The founders of modern liberalism had no doubts about the positive links between philosophical liberalism and capitalism (or “commercial society” as they would have dubbed it). Adam Smith argued that self-seeking produces “universal opulence”. David Hume noted that merchants “check the power of the ancient nobility” and produce political pluralism. Voltaire described the London Stock Exchange as a temple of toleration and cosmopolitan values.
They were broadly right. The advance of liberalism shadowed the advance of capitalism — first in medieval Venice, then in Renaissance Florence, then in the Dutch Lowlands, then most spectacularly in Britain and America. The building blocks of both capitalism and liberalism are identical: individual rights in both law and custom, freedom of choice in both politics and the marketplace, the separation of politics from economics, freedom of conscience, and debate. Numerous countries are both liberal and capitalist. No sighting has yet been reported of a country that is both liberal and non-capitalist.
Yet it is important to add a qualification: if you cannot have liberalism without capitalism, you can certainly have capitalism without liberalism. In the 1930s, both German companies and, even more disgracefully, foreign multinationals cooperated with the Nazis: Coca-Cola not only sponsored the 1936 Olympic Games but passed itself off as a German company. Since the turn of the century, authoritarian capitalism has been on the march. China is pioneering an idiosyncratic synthesis of market mechanisms with Leninist power.
A neverending battle rages within the soul of capitalism — between the liberal values that ensure its success in the long run (competition, meritocracy, individualism) and the pursuit of short-term advantage (controlling markets, seducing governments, debasing culture). This battle has usually been resolved in the West in favour of liberalism thanks to the efforts of responsible and far-sighted intellectuals such as John Maynard Keynes. But today the wrong side of capitalism is winning precisely when too many intellectuals have abandoned philosophical liberalism for illiberal ideas about group rights and identity politics. (Confusingly, many Americans use “liberal” as a synonym for “progressive” or “left wing”. Here I will use “liberal” to refer to a supporter of the philosophical movement that developed in the 18th and 19th centuries and will use the term “progressive” to refer to “progressives”.)
Liberalism started life as a critique of the absolutist European state of the 17th and 18th centuries. The Cambridge historian Lord Acton declared (in an off-the-cuff remark in a letter to a friend) that “power tends to corrupt and absolute power corrupts absolutely”. Liberals limited the power of the executive through intricate constitutional mechanisms (bills of rights, checks and balances, and regular elections). They also gave people the freedom to create corporations at will rather than having to go cap in hand to the government to get a corporate charter. These new corporations were to be “little republics” as opposed to state-licensed monopolies such as the East India Company.
Today we are witnessing a degree of economic concentration that we have not seen since the late 19th century: a collection of superstar companies is consolidating their power at the heart of the global economy and exercising enormous political influence at home and abroad.
This process of concentration is at its most marked in the US, the great dynamo of the capitalist system, and in the industries of the future, notably tech. “No matter the measure you choose, the long-run increase in corporate concentration is clear,” notes recent research from the University of Chicago Booth School of Business. The authors found that “since the early 1930s, the asset shares of the top 1% and top 0.1% corporations have increased by 27 percentage points (from 70% to 97%) and 40 percentage points (from 47% to 88%), respectively”. The Economist calculates that concentration across the US economy is higher today than at any point in at least the past century. Of the 900 sectors of the economy the paper has been tracking, the number where the four biggest firms have a market share above two-thirds had risen from 65 in 1997 to 97 by 2017. The rate of creation of small firms is at its lowest rate since the 1970s. Some tech companies have market shares reminiscent of the Gilded Age, with Google having more than 90% of the global search engine market, for example. “Competition is for losers,” says Peter Thiel, one of the central figures in the so-called PayPal Mafia that now plays a leading role in Silicon Valley.
The consolidation of economic power leads inexorably to the consolidation of political power. Companies are no longer content with putting pressure on legislators to vote in the right way. They increasingly write the legislation themselves — a convenient ruse that is helped by the US congress’s habit of producing elephantine legislation such as the 2 000-plus-page Dodd-Frank financial reform bill — and set the terms of debate by funding think-tanks and pressure groups. Though Brussels does not yet have as many lobbyists as Washington, it is, if anything, even more conducive to insider deals, with a revolving door between giant corporations and the Berlaymont building that houses the European Commission.
Acton’s law can be seen in the growing willingness of respectable companies to engage in practices that were once confined to the backstreets. Multinationals routinely use foreign direct investment (FDI) to reduce the tax they pay, creating holding companies in low-tax districts or using “transfer pricing” to charge subsidiaries for the use of corporate assets. Apple’s cosy deal with Ireland allowed it to channel most of its non-American sales and profits through special corporate entities. Google achieved an effective tax rate of 2.4% on its non-American profits in 2007-2009 by routing profits to Bermuda, via Ireland and the Netherlands (a variant of a strategy known as a “double Irish with a Dutch sandwich”).
The consolidation of capitalism is also producing a new class of oligarchs that is almost as rich and powerful as the Robber Barons of the late 19th century. (When John D Rockefeller, the founder of the Standard Oil Company, died in 1937, his estimated net worth of $1.4-billion was equivalent to 1.5% of US GDP; Elon Musk’s current net worth is below 1%.) Plenty of rich people make their money through fair competition and use their wealth to create lifesaving and prosperity-spreading foundations, not least Bill Gates. Plenty but not all. There is something of the Roman Empire about the fashion among tech titans for defying death (perhaps with the aid of “blood boys”) or one-upping Icarus (by colonising Mars) or for revelling in plutocratic excess.
Liberals have spent their long history fighting the idea that individuals are the mere vectors of group identities or the servants of popular opinion
Liberalism was born in the fight of outsiders against insiders: liberals were usually humble radicals who wanted to subject decadent institutions to fair competition. Adam Smith fulminated against the East India Company’s monopoly on trade with East Asia. The Economist was founded to secure the abolition of the Corn Laws that rigged the price of corn on behalf of landowners. John Stuart Mill argued that the civil service should be thrown open to merit rather than used as a foundling home for indolent children of the privileged.
Today’s capitalism is honeycombed with insider deals. The idea of linking remuneration to stock was supposed to exert discipline on managers by forcing them to act like entrepreneurs, exposing them to the downside as well as the upside of capitalism Instead, managers used their inside power to game the system by writing contracts that protected them from the downside (“golden parachutes” and the rest) while giving themselves the right to sell stock at a time of their own choosing.
This system of insider privilege poses a profound threat to a central liberal principle: meritocracy. Philosophical liberals argued for meritocracy for two reasons — partly to discover talented children wherever they are born and give them the opportunities they deserve but also to prevent the children of the rich from hoarding opportunities and transforming themselves into a decadent hereditary class. Teddy Roosevelt embraced the inheritance tax in part because he believed that, by divorcing wealth from work and position from effort, giant inheritances were as dangerous for the rich as for the rest of society. Today’s rich are doing what they can to turn TR’s nightmare into a reality. From 1990 to 2021, the number of US billionaires increased from 66 to 745 and the amount of wealth in their hands grew from $240-billion to over $5-trillion. Most of these billionaires have devoted enormous ingenuity to passing this wealth onto their children. An article for ProPublica in September 2021, based on IRS returns, estimated that more than half of the 100 wealthiest Americans had used “special trusts” to avoid any inheritance tax whatsoever.
The hero of the liberal drama is the self-governing individual. Liberals have spent their long history fighting the idea that individuals are the mere vectors of group identities or the servants of popular opinion. Mill was one of the first people to argue that women should not be defined by their biology, most notably in The Subjection of Women, and one of the first to warn against the dictatorship of popular opinion.
Liberal worries that consumer capitalism might pose a threat to liberal individualism have always betrayed a touch of snobbery — as if the poor should be content with homespun clothes rather than lusting after the latest fashions. But the arrival of the latest iteration of capitalism — information capitalism — is giving those worries real substance. Information capitalism depends on companies sucking up endless streams of information from the various devices that have been all but grafted onto our bodies and using that information to manipulate our everyday choices. Today’s information giants are, above all, advertising companies that persuade us to give up our most intimate secrets in return for various conveniences and then sell those secrets (duly anonymised) to whoever will pay for them.
Information capitalism embodies a serious threat to the liberal notion of a rational individual. It keeps us constantly exposed to “hidden persuaders” that beep and flash at us from our phones wherever we go. It reduces our sense of agency as employers watch our every move over our shoulders. It plays havoc with our powers of concentration, as we scroll through tiny bursts of information and entertainment.
Liberals have always argued that a world of individualism needs to be complemented by a strong emphasis on education in order to equip children to make informed choices. But information capitalism undermines education by exposing children to a kaleidoscope of distractions. Many report spending more than seven hours a day on their phones. Jon Haidt, a psychologist at New York University, has warned that we are witnessing the “transition from a play-based childhood … essential for overcoming fear and fragility, to a phone-based childhood which blocks normal human development by taking time away from sleep, play and in-person socialising”. Liberals have also warned about the danger of replacing a world in which opinion is dictated from above to one in which it is dictated by the mob. Information capitalists empower the mob by making it easier to publicise examples of “wrong think” or else organise digital swarms to hunt down heretics. The age of the individual is giving way to the age of nanosecond attention spans and electronically imposed conformity.
What can be done about this growing tension between capitalism and liberalism? In the Gilded Age, governments across the world pushed back against the overweening power of companies in the name of the New Liberalism, which gave more power to the state to break up monopolies and impose inheritance taxes. There are some welcome signs of a resumption of such policies. The US government has opened an antitrust case against Google in a sign that it is rethinking its generally tolerant attitude to concentration. Campaign groups such as UsforThem have come together to demand bans on smartphones for under-16s and the publication of health warnings on gadgets.
Since the publication of Robert Bork’s The Antitrust Paradox in 1978, antitrust thinking has narrowly focused on the question of consumer welfare. It should pay more attention to the threats that concentration poses to innovation and the state’s regulatory power. The European Union has rightly taken a more robust attitude to tech power by, for example, penalising companies for invading privacy and, most recently, forcing Apple to move to generic cables for its devices rather than obliging customers to purchase Apple products. Governments have been preparing for years for a global minimum tax intended to eliminate tax loopholes and tax havens. After years of patient work, this reform is in danger of failing because of resistance in the US congress and a general loss of momentum. The Biden administration and the EU need to give the reform another push.
There are dangers in a resumption of state activism. The industrial policy favoured by the Biden administration, for instance, is a recipe for corporatism not competition. It needs to avoid using antitrust as an instrument for favouring particular companies or telling them where to produce their components. The aim is to promote competition rather than dictate the shape of the economy. The EU needs to avoid exploiting competition policy as a way of tormenting American companies. There are also limits in how much the state can do to protect virtues such as individualism. But state activism definitely needs to be part of the mix: after several decades in which we have assumed that the greatest threats to the liberal order come from organised labour or radical activists, we need to pay much more attention to the threat coming from capitalism itself.
Will this new government and civil activism be enough to check the tendency towards the concentration of power and wealth in a few hands? Big business’s embrace of corporate do-goodery extends business’s control over policy making while making it more difficult for new companies to get off the ground. The new generation of corporate founders are reaping rewards that make the previous generation’s look modest. Seven of the 10 most valuable compensation packages for US public companies in 2020 were to CEOs of start-ups that listed publicly that year, for example. AI is likely to add to the pressure of concentration as it weaves itself into our everyday lives because only corporate giants such as Google and Microsoft can afford the computing power and talent bank necessary to compete.
One of liberalism’s great virtues is its ability to reinvent itself while also saving capitalism: witness the New Liberalism of the Edwardian era or the Keynesian revolution of the 1940s. But can it reinvent itself for a third time when so many of the world’s intellectuals have soured not only on capitalism but also on central liberal principles such as individualism or freedom of expression? A crisis of capitalism is survivable so long as you have a healthy liberalism, and a crisis of liberalism so long as you have a healthy capitalism. But to have both capitalism and liberalism lying in their sickbeds together puts us at a truly dangerous moment. — Adrian Wooldridge, (c) 2023 Bloomberg LP