Voters want to rule but economic forces are not easily subdued
While the economy can often be chaotic, living with the whims of market forces is preferable to being under the sway of potentially despotic government where the whims of the leader(s) can pass judgement for best or worst. Markets have worked to spread political power more widely as money made within the economy creates the means to gain influence against traditional centres of authority. Yet, the reverse has happened as globalization has strengthened the hands of those with economic power while the ability of government to act is being eroded. With the helping hand of government being taken away, many people feel overrun and are looking for ways of fighting back against economic forces but getting back control will probably come with a nasty economic backlash.
One of the core features of capitalism is that no one is in control. The economy instead comes into being through the multitude of actions of individuals and companies in their daily transactions. Everyone involved is a small player relative to the size of the economy and so must play by its rules that are the same irrespective of who you are. Competition keeps businesses on their toes and ensures that resources are put to their optimal use and each of us get some rewards for what we contribute to the economy. For all those willing and playing by the rules, no one can be shut out or needlessly limited in their actions, and hence are free to act as they please (within the law).
What we take for granted today was a major revelation when it first took hold in a world of hereditary monarchy when the word of one person could change the law of the land and impact on the lives of many. This concentration of power was broken up with the rise of the merchant class which offered up new ways of getting wealthy other than through inheritance. Even if other sources of wealth diluted the absolute power of past sovereigns, the growing levels of prosperity that increased trading could create were attractive to rulers at the time as it enabled large armies to be amassed.
The development of manufacturing opened up further avenues to gaining wealth on a large scale for individuals from humbler backgrounds. The growth of cities and the dismantling of the older traditions continued to erode the legitimacy of the rule of monarchs. Thus, political power was dispersed into the general population from a narrow base of land owners spreading until all adults had the right to vote. Democracy as a political system is geared towards preventing the concentration of power and often comes with additional built-in mechanisms, such as checks and balances, to ensure that no one can take over.
The economy also operates in such a way that no one should be able to dominate. Multitudes of businesses offer up similar products and compete for customers in terms of price and quality so that only market forces hold sway. But circumstances can change if one company grows large enough to gain leverage which can then be used against its rivals. This amassing of economic power has been balanced with government regulation that attempts to ensure a free and open marketplace for companies to operate in so that we all benefit.
Maintaining such a level playing field for business has become more difficult with the rise of a large international market. With greater scope for companies to expand and also potentially make use of economies of scale, big business has bulked up. Add in the capacity for companies to move operations to different places and governments have struggled to reign in the corporate heavyweights. With business in the driving seat and globalization unleashing larger market forces, the economy has become less manageable. Without the oversight of government, capitalism also seemed to be less fair and not able to be controlled for the benefit of a wider range of people. On top of this, the gains from economic growth have been spread out less evenly in the West resulting in rising levels of inequality.
Such an outcome has left many people frustrated and the results has been a push within politics to “take back control”. The policies being promoted typically involves lower levels of trade and immigration as a means to promote employment within the domestic economy. While these measures seem like common sense at first glance, less movement of goods and people would result in a reversal of many of the recent gains from globalization that helped bring about lower prices and greater selection. Such an outcome would be likely as more stringent controls at the border limits businesses from boosting production to achieve greater economies of scale and restrict the extent to which people can earn to their full potential.
The worries about being thrown to and fro by the economy is a valid concern as the heft of international business rises. Previously, the emphasis had been to ensure economic growth so that people could achieve a higher standard of living. The trade-off was that livelihoods could be upended if markets shifted due to the uptake of new technology or changes in consumer behaviour and thus put people out of jobs and drive companies into bankruptcy. People would be more willing to accept any ups and downs in their own personal circumstances if the economy offers the promise of a way to get back on track. Yet, wages for many people have stagnated over the past few decades so opportunities to bounce back are limited.
People are thus faced with choices in which any gains are likely to be small but the risk of hard times remains as a genuine threat. It makes it more likely that people will focus on their own narrow concerns without much scope to think of others. And with a greater gap between the have and the have-nots, it is harder to work up the ladder to higher pay and achieve a comfortable life. Even people that are relatively well-off may be less willing to uproot their lives as the economy changes. This is because home ownership and the growing demands of bringing up children mean that more highly-paid workers are less likely to move somewhere for a better employment opportunity.
Thus, it could be argued that with further gains being tough to come by or requiring too much of a sacrifice, more and more people seem to be happier to stick with what they have rather than push for more. It might seem strange considering the constant efforts in attempting to achieve a bigger economy but the environmental movement in the 1970s resulted in the choice being made to forgo a bit of economic growth for cleaner air and water. The way in which this dilemma was resolved in the past was through the government stepping in and recalibrating the economy so as to better achieve the desired results.
The government could thus also do more to help out people struggling due to changes in the economy but such measures have not been popular with voters. Part of the concern is how such policies would impact on the functioning of the market. For example, any policies to deal with inequality could take away motivations for people to look after themselves and potentially make them a burden to society. Increased taxes, which is the main means of funding social welfare, could also sap the incentives of entrepreneurs to work hard and take risks. And, the current political climate means that people tend to frown upon any help for those that have fallen on hard times as it goes against their sense of fairness.
As such, the main political avenue for anyone feeling as if they are missing out from economic growth has been the “build a wall” option rather than the “share the wealth” alternative. The mindset being that the worst of economic forces can be shut out and people would be free to get on with their lives. Yet, such a stance tends to go against past history which suggests that closing off the country tends to end badly. The potential impact from withdrawing from the global economy would be even greater nowadays considering that trade has helped keep inflation down while also facilitating higher earnings for those working across borders.
It is therefore not immediately obvious why such protectionism has garnished so much popularity, and a number of reasons could be put forward. For starters, the measures involved such as putting up barriers to trade or to immigration seem to deliver obvious benefits in the form of less competition for jobs and more of a market for domestic goods. The expectation of relatively immediate gains makes it easy for politicians to put forth such proposals to voters with the added benefits in that no extra spending would be needed and the policies could be framed to appeal to nationalist sentiment. On top of this, higher levels of wealth may mean that people are scare of losing what they have even if that may not be much and are thus more likely to “circle the wagons” against any oncoming threats.
In contrast, higher taxes to help out those struggling is a harder sell at a time when we are expected to fend for ourselves and government cannot be trusted to get the money to those that might actually be deserving. Coming together to help people through hardship is also more difficult when globalization has resulted in more heterogenous societies in the West. The Left leaning political parties have also shifted their focus from those at the bottom of the economic ladder towards people with a cultural disadvantage.
With the Right often being dominated by populist, it might be up to the Left to develop an option that will be more palatable for voters in terms of using the gains from globalization to help out those that have been put on the backfoot. While such measures will come with a cost of potentially slower growth, the results would be far preferable to the potential economic harm that might be done if countries close themselves off from the global economy. Put another way, higher taxes might sap the momentum of capitalism but reducing the flows across borders would be like throwing economic forces into reverse.
The current manifestation of efforts to pull up the national drawbridges has been relatively mild but the supply-chain snags caused by Covid are just a taste of what could happen if globalization is pulled part. A nightmare scenario would be for future attempts to shut off from the global economy becoming more fervent as politicians decide to double-down after the initial attempts fail. With this real prospect of populist policies triggering an economic downward spiral, a slower economy where the gains continue to build up but are shared around more would be better than an economy going backwards.
Free Range Economist 