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Post-democratic Capitalism
by Colin Crouch
Tuesday Apr 27th, 2021 11:25 AM
The fact that money can buy political influence is a central problem for democracy. All citizens are equal in terms of their voting rights, but not in terms of their wealth - this is one of the great unsolved challenges of liberal systems of government. As long as economic inequality remains within bounds or even declines - and as long as it does not play a major role in political processes - the tension it creates is bearable.
Post-democratic Capitalism
On the connection between corruption and inequality
by Colin Crouch
[This article published in April 2021 is translated from the German on the Internet,]

The fact that money can buy political influence is a central problem for democracy. All citizens are equal in terms of their voting rights, but not in terms of their wealth - this is one of the great unsolved challenges of liberal systems of government. As long as economic inequality remains within bounds or even declines - and as long as it does not play a major role in political processes - the tension it creates is bearable. But neoliberalism, which dominates most economies today, has exacerbated the problem in two ways: first, it is responsible for the significant rise in material inequality; second, it has legitimized the use of wealth for political influence. And the latter is accompanied by another major problem: that of corruption.

In principle, no political or economic system is immune to corruption. In fact, in non-democratic systems, where a government can largely operate behind closed doors and critics are persecuted, corruption is commonplace. If one can use the power of state organs without any risk to extract money for oneself, one's friends and relatives, why not do it? The procedure works in any dictatorial regime, whether it is headed like a monarchy by a ruling family, by military officers, or by a communist party whose leader has at his disposal all the resources of an all-powerful state apparatus.

Things are different in a democracy, where the opposition and a curious press are always on the lookout for anything suspicious. But an elected government can hide much of what it does from the media, and it is still possible today for a charismatic leader with appropriate parliamentary backing to turn public office into a personal fiefdom. Moreover, where corruption is rampant, opposition parties not infrequently hope to inherit the networks that nurture it, as it were, when they come to power themselves, and therefore hold back on critical inquiries. Much depends on the culture that has developed in a party or authority. Where there has been no corruption so far, it is difficult to get it going because the rules of openness and responsibility that apply there nip it in the bud. Once it becomes prevalent, however, it can be downright impossible to eradicate, since so many are attached to its feeding troughs.

Under neoliberalism, corruption often occurs by defining certain previously frowned-upon behaviors as not corrupt. This fits the circumstances of a post-democracy in which public affairs are in the hands of overlapping business and political elites who claim to abide by rules that in reality have long since been eroded and that they can bend at will.

According to the theory, political corruption cannot actually exist in neoliberal capitalist regimes. Classical economic theory assigns only a secondary role to the state in a free market economy - and thus there would be nothing to be gained by trying to gain influence over it. The authorities' sole task is to maintain competition in the market by preventing monopolies and oligopolies. Corruption would thus be possible only in regimes in which state institutions work closely with selected companies - in France, they once spoke of "national champions".

In the exemplary traditions of liberal states in the 19th and 20th centuries, there were also strict rules aimed at maintaining an appropriate distance between officeholders and private entrepreneurs, reflecting the relationship in which politics and business should stand to each other in a market economy. Although these rules were of liberal economic origin, they also appealed to the social democratic parties, which were naturally suspicious of the influence of wealthy businessmen. Therefore, there was broad consensus regarding their validity, even if corruption and illegitimate influence of the wealthy on politics were more common in practice.

Since neoliberalism is usually associated with neoclassical economic theory, it is all the more surprising that its proponents have broken with this liberal tradition. They cite two reasons for this: the changed importance they attach to competition and the introduction of "public reform management" or New Public Management (NPM). Quite a few neoliberal authors argue that the freedom of consumer choice made possible by competition is less important than the "consumer welfare" improved by efficiency gains.

NPM advocates also do not value maintaining the distance between business and politics. Because they believe that the state and authorities are incompetent in principle, they insist on the old principle that the state must stay out of the economy, but at the same time they advocate the interference of the economy in the state, which, they claim, can significantly increase its efficiency. They also reject the provision of services by the state - if these are really necessary, they should at least be in the hands of private companies. This leads to a third change in the classical liberal understanding of the division between private and state spheres. All three developments promote the risk of corruption and contribute to the emergence of post-democratic elites in business and politics that are detached from ordinary citizens. In what follows, we will consider each in turn.
Imperfect competition and pro-corporate neoliberalism.

Neoclassical economic theory is based on the idea that the market is a place where a multitude of suppliers and demanders meet. Under this premise, the accumulation of power in the hands of individual market participants is impossible, which is why the idea of the market fits that of a democracy, where inequality is low and pluralism of opinion prevails.

In a "real" market, both the entry of new suppliers and the exit of inefficient ones are readily possible at any time. Competition among producers not only ensures freedom of choice for consumers, but also ensures that neither individual suppliers nor a small group of suppliers can dominate the market. Inequality does exist in terms of income, since producers have an incentive, supported by the market system, to constantly improve their offerings in order to attract more customers. But this inequality remains within bounds, since high profits in a given business area attract other suppliers who broaden the supply, which again reduces profits. This model works as long as the condition of easy market access for new suppliers is met.

The fulfillment of these conditions is so important that even classical economic theory, although it actually rejects government intervention in the economy in principle, envisages the installation of effective competition regulators to prevent monopolies and break up situations in which there are not enough suppliers competing to form a true market. In some key sectors of the economy, however, it is almost impossible to maintain a large number of suppliers. For example, in the energy sector, car, aircraft or ship manufacturing, and in the mass production of pharmaceuticals, large initial investments are required, which represent a significant barrier to the market entry of new suppliers. Other sectors, such as the food industry, require extensive distribution networks, which has similar consequences. Recently, moreover, gigantic corporations have emerged in the field of information technology, with quasi-monopolies.

The advent of the Internet initially opened up a host of new types of business opportunities. In some areas, these continue to exist, but the Internet is, as the name suggests, a network of networks - and these have a momentous economic peculiarity: the value of a network is directly determined by its size, with additional advantages accruing to the largest network. No one joins a seventh- or tenth-largest network, because the benefits of the network increase with its size - the technical term for this is "network externality". That's why, in a short time, a few Internet-based monopolies (Apple, Microsoft, Google, Facebook, etc.) have become the largest and most valuable companies in the world virtually overnight.

Somewhat later, the so-called platform companies have come along, using the Internet to market services that have nothing to do with IT: Cab services, package delivery and food delivery, short vacations or, like Amazon, a whole range of products and services. They are subject to the same logic as networks: here, too, users usually opt for the largest provider available. And there is another factor: If a company decides to aim for a monopoly position (or at least a significant restriction of competition) and is able to accept losses for a while to achieve this - as in Amazon's case - it can set its prices so low that smaller competitors have to give up. The new monopolist can then reap the rewards of its network dominance and raise prices at will.
at will.

Economists are divided on this problem: Some see no other solution than to keep working towards functioning competition, others consider limited competition to be beneficial and advise not to do anything about it.[1] They try to prove that economies of scale, i.e. efficiency gains from large-scale production, can be increased practically indefinitely and that therefore, from the point of view of "consumer welfare" - which in their eyes is more important than freedom of choice - there is no reason to insist on real markets. In contrast to neoclassical economists, they regard the requirements of a competitive order as already fulfilled when the "market"-dominating firms have emerged victorious from a competition - even if this means that competition has effectively ended.

Two manifestations of neoliberalism can be distinguished here: On the one hand, there are pro-market neoliberals for whom functioning markets are the most important thing; on the other, there are pro-corporate neoliberals who defend the advantages of large, oligopolistic companies. This division is not only evident in theoretical issues; it also has a direct impact on competition law. Pro-market neoliberals rely on antitrust law, such as the "antitrust" laws in the U.S., to prevent corporate concentration, while commercial courts sympathetic to the arguments of pro-corporate neoliberalism are unlikely to apply the relevant rules.

Pro-corporate neoliberals usually do not care about the political consequences that result from their approach - for example, in the form of growing inequality or huge fortunes that can be used for political purposes. If they do, they simply claim that the state merely needs to stay out of the economy in order to remove any incentive for corporations to interfere via lobbyists. This suggestion, however, is more than naïve, not only because capitalist economies regularly rely on state support for risky innovations and in terms of infrastructure.
As the financial crisis has shown, it happens that economic sectors dominated by a few companies acquire such strategic importance for the national (or global) economy that the collapse of even just a few such "systemically important" companies could lead to a serious shake-up of the entire system. This is certainly true of banking; but it is probably also true of energy, defense, and some privatized public services. Although both pro-market neoliberals and social-democratic critics argue that the collapse of some large corporations must be allowed to prevent the survivors from taking similar risks in the future, in practice governments can hardly be indifferent to the fate of certain sectors.

New Public Management: The Intertwining of Business and Government
Neoliberal authors like to claim that potentially corrupt relationships between government agencies and favored businesses are typical of the "cronyism" of Japan or Korea or the former state capitalism of France or Italy; such abuses, however, would quickly disappear as a result of the neoliberal reforms they call for. Unfortunately, however, this has not happened. Rather, neoliberalism has merely provided a new legitimacy for inadequate or absent regulations through which such relationships persist.

This was made catastrophically clear in early 2019 when the crash of two planes operated by an Indonesian airline and an Ethiopian airline - both Boeing 737 Max 8 aircraft - killed 356 people. The Boeing company is a flagship of the U.S., competing with the European aircraft manufacturer Airbus. Because Boeing wanted to put the sophisticated new aircraft into service as quickly as possible, the company is said to have dispensed with due diligence during construction and testing. Although the U.S. has an independent aviation regulator, the Federal Aviation Authority, whose budget and influence were cut in several waves of neoliberal "reforms" to such an extent that it allowed Boeing to carry out the safety tests for which it is responsible with its own employees. By all accounts, the tests were inadequate; a fundamental flaw went undetected; the planes were certified; and 356 people died.

Monopolistic and anti-competitive tendencies
Today's economy is highly dominated by monopolistic and anti-competitive tendencies. While we should not underestimate the ability of competition regulators (and the ECJ in particular) to address the problem, the relevant authorities are themselves an example of the impossibility of disentangling economics from politics. Where free-market competition can no longer guarantee quality and safety because it does not take place at all, only regulations can help us; but neoliberal policies continue to dismantle them, and large corporations have the means to influence regulatory projects and shape them according to their own ideas. The doctrine that business interference in politics is a good thing and only government interference in business is a bad thing has contributed greatly to post-democratic conditions by increasing the lure of the political class to seek close contact with business elites. Neoliberal theorists have increasingly criticized the original liberal notion that a distance should be maintained between representatives of the state and business. In their view, this cut off the public sector from developments in the private sector, where competitive pressures brought constant innovation. The old ideas were replaced by the concept of "New Public Management" ("public reform management"), which was intended to enable public authorities and public service providers to act more or less like private companies. It promoted the development of close relationships between politicians or public authority managers and the companies they commissioned, because in this way, it was claimed, "entrepreneurial thinking" could find its way into public authorities. The former boundary between business and the state thus became a semi-permeable membrane: companies were supposed to interfere in state affairs, while the state was supposed to stay out of business. This created one of the main mechanisms of legitimizing a practice formerly identified as corrupt, while at the same time fostering the increase in inequality that threatens democracy.

Taken together, monopoly tendencies and NPM have greatly facilitated political lobbying for business interests. One example is the International Life Sciences Institute, an ostensibly neutral scientific organization that conducts research and advises the EU and the U.S. government on food health issues. As it turns out, however, it is a lobbying organization for the food industry, whose studies are designed to obfuscate the evidence about the adverse health effects of sugar, alcohol, and other products of that industry.[2]

Consultants from the private sector have now penetrated deep into the bowels of government structures, where they can not only give advice but also prepare policy decisions and even recommend the purchase of certain products - such as their employers' computer systems - by the public sector. Employees of U.S. health care companies have advised the U.K. Department of Health and Social Care on, of all things, how to involve private companies in government health care - a practice that only met with resistance when private companies began to take a dominant role in the fight against the coronavirus. Politicians and civil servants are allowed to act as "consultants" to private companies after leaving public service, and they use their contacts to give their new clients advantages in bidding for contracts. This is also how former technology advisors to the Obama and Trump administrations have ended up in leadership positions at Amazon, where they used their old connections to push the sale of Amazon technologies to U.S. government agencies.

Private consultants deep inside government structures
Another example is the elaborate lobbying that the U.S. healthcare industry did against the Obama administration's healthcare reform. As the British daily newspaper "The Guardian" reported on October 1, 2009, American health insurers, hospital companies and pharmaceutical companies employed six lobbyists for each member of Congress, costing $380 million for their campaign against "Obamacare". The "campaign" consisted primarily of donations to the re-election funds of incumbent members of Congress. Although the corresponding law was eventually passed, the reforms were watered down in important aspects, including the fact that substantial government subsidies for compulsorily insured persons went to private companies.

It has now become routine for British ex-ministers from various parties to enter into business relationships with companies from the sectors for which they were responsible in government. And former Social Democratic Chancellor Gerhard Schröder, during whose term in office important contracts for Russian gas supplies to Germany were concluded, subsequently joined the supervisory board of subsidiaries of the Russian energy giant Gazprom. Such a "flying change" from politics to business violates all the rules that once applied to the relationship between business and the state. At that time, such a move also occurred, but drew criticism and sanctions; today, the players even boast about it. That is why no elaborate investigations are necessary to uncover such connections. Whether corruption actually plays a role in this may not be so crucial: After all, corruption becomes unnecessary when interests can be shamelessly intertwined in this way.

The outsourcing of public services
The privatization and outsourcing of public services has opened up an important new field for the growing political influence of private capital. According to the theory of "New Public Management," removing such services from the direct responsibility of public corporations and making them marketable brings efficiency advantages, for example, through better control of the professionals employed and greater freedom of choice for users. The prerequisite for this is that, once outsourced, the services are actually provided under real market conditions, i.e., in competition with other providers. In practice, however, this rarely happens.

In a study on the development of the new market in the field of childcare in the UK, the umbrella organization of so-called social enterprises [3] (Social Enterprise UK 2012) complained that smaller providers were often squeezed out of the market by private equity companies, which, due to their business model, had advantages in tenders for the operation of children's homes. The concept of "social enterprise" is in line with "new public management": competing non-state providers are to deliver social services and apply commercial practices to activities that were previously the responsibility of state or public sector agencies and their professional staff. "Social enterprises" are not intended to be exclusively profit-oriented and therefore often have great difficulty competing with traditional profit-oriented enterprises.

In the field of outsourcing of public services in Great Britain today, a few companies dominate to such an extent that the British state is downright dependent on them. Remarkably, these companies are awarded contracts across an unusually wide range of services - from defense to social care - even though they have no experience, expertise or track record in the relevant field. Their core business, then, is not to provide any specific service, but to win government tenders - and that often means, above all, having good contacts with civil servants and politicians. Using the sarcastic phrase about the banking groups rescued by the state during the financial crisis, Social Enterprise UK stated that these private contractors are now "too big to fail" or "systemically important," i.e., indispensable for maintaining public services and infrastructure in the country. Some companies have had to pay fines for breaches of tender conditions and have had to return individual contracts, but have subsequently been awarded new ones. Others have run into financial difficulties because they used their seemingly secure position as government contractors in an unsustainable way to improve their stock market ranking.

Carillion, for example, a giant construction group and facilities management provider, went bankrupt in 2018 with £2 billion in debt; Interserve, provider of an almost bizarrely broad range of public services from school meals to offender rehabilitation, collapsed later that year. The British state tried to save these companies by awarding them new contracts - which resulted in further consequential costs for taxpayers. Obviously, such companies are either so important that the state is dependent on them, or they have such a tight grip on the bidding process that no one can stand in their way.

As in medieval economies
The outsourcing of government services is always justified by the desire to break up state monopolies and give "customers" greater freedom of choice. However, the contracts in question are awarded by public authorities - so they are now the customers who have freedom of choice. The citizens who use the respective service are merely users, i.e., pseudo-customers. The contractors must answer not to them but to the authority, whose interests are not necessarily identical with those of the users.

Moreover, for practical reasons, such contracts often have long terms, sometimes twenty years or more, since it makes little sense to renegotiate the operation of a school or hospital every year. So something like a market exists here only at a few individual points in time, namely at the moment of the tender. For this reason, outsourced government services are in reality a different form of organization: licensed private monopolies, as we know them above all from medieval economies.

Moreover, government agencies that outsource their tasks to private firms are increasingly losing the knowledge and experience needed to provide them and, as a result, are also less and less able to competently evaluate the performance of their contractors. Not only is this highly likely to lead to a decline in the quality of the service provided, but it also increases the state's dependence on a relatively small number of private companies, which will soon be the only actors with relevant expertise. Such outsourcing measures are therefore to such a high degree political and at the same time oligopolistic decisions that they can no longer be considered elements of a genuine market economy. At the same time, democracy is obviously powerless in the face of the networks of the profiteers of these measures. It has therefore been clear for some years that such privatizations - notwithstanding all the shortcomings of state service systems - are by no means fundamentally advantageous, and certainly not under all circumstances.

The informal political sphere as an undemocratic place
As a result of increasing inequality and the enormous funds at the disposal of "systemically important" companies, the balance of power between civil society groups and lobbyists is shifting. The sphere of informal politics, vital to democracy, is thus becoming an undemocratic venue. Under the guise of neoliberal ideology, which claims to separate state from private power, the two are merging under the aegis of a few privileged corporations. Indeed, this raises the question of whether capitalism and democracy are as mutually dependent today as they once appeared to be[4] - or, more poignantly, whether they are compatible at all.

It is still generally assumed that capitalist businessmen prefer democracy because of their aversion to dictatorships in which the state can intervene in the economy at will, make arbitrary decisions, and change the rules of the game behind closed doors. While the current enthusiasm for investment in China increasingly casts doubt on this assumption, so far the Pinochet regime in Chile is the only exception to this rule: It acted cruelly and ruthlessly, but pursued a non-interventionist, strictly neoliberal economic policy recommended by its advisors trained by Milton Friedman and other Chicago economists.
A modern democracy usually guarantees the rule of law, ensures transparent legislative procedures, and thus allows for lobbying in this regard. On the other hand, in democracies, many regulations designed to protect non-market and non-corporate concerns find majority support. Therefore, capitalists prefer post-democratic forms of government in which democratic procedures and elements - first and foremost the rule of law - persist, but the electorate remains passive, refrains from any disruptive activism and does not produce a vibrant civil society powerful enough to form counter-lobbies and counter the silent activity of business representatives in ministry corridors.

Postdemocratic capitalism as capitalism without regulation
Thus, post-democratic capitalism no more requires a formal renunciation of democracy than corporate neoliberalism requires a condemnation of the market. In fact, the market economy and democracy still serve to legitimize the emerging political system of corporate domination, since the latter have no legitimacy of their own. The elements for such legitimacy are present, but are currently used only in sideshows.[5] For example, pro-corporate neoliberals have developed a justification for exempting dominant firms from the restrictions of competition and antitrust laws. The theory of NPM, in turn, justifies the removal of barriers between government officials and company representatives that were once indispensable to liberal economic policy.

If we look beyond what has been discussed so far, the concept of "corporate social responsibility" not only gives corporate management a social legitimacy that goes beyond its task of maximizing profits, but also suggests that ultimately there is no longer any need for politics to combat market failures. And since Keynesian demand management is widely rejected, corporate interests enjoy unrestricted priority in politics because of the general desire for high employment figures.

Certainly, it has not yet come to the point where corporations completely dominate politics; otherwise, consumer protection and workers' rights would already be reduced to a minimum. However, this is the direction in which the journey is heading - and which is massively promoted by the constant increase in inequality and the mutual reinforcement of political and economic power.

This article is based on "Postdemocracy revisited", the latest book by Colin Crouch, which has just been published by Suhrkamp Verlag.
[1] Robert H. Bork, The Antitrust Paradox. A Policy at War with Itself, New York 1978; Richard A. Posner, Antitrust Law, Chicago 2001.
[2] Sarah Steele et al, Are industry-funded charities promoting advocacy-led studies or evidence-based science?, in Globalization and Health, 2019.
[3] A "social enterprise" in British law is an organization that is intended to provide social services through commercial strategies and ways of working; see Colin Crouch, The Quantified World. Wie die Logik der Finanzmärkte das Wissen bedroht, Frankfurt a.M. 2017, p. 154 ff.
[4] Wolfgang Merkel, Is capitalism compatible with democracy?, in "Zeitschrift für Vergleichende Politikwissenschaft", 2/2014, pp.109-128; Wolfgang Streeck, Comment on Wolfgang Merkel, Is capitalism compatible with democracy?, in "Zeitschrift für Vergleichende Politikwissenschaft", 1-2/2015, pp. 49-60.
[5] Colin Crouch, Can there be a normative theory of corporate political power?, in: Volker Schneider and Burkhard Eberlein (eds.), Complex Democracy. Varieties, Crises, and Transformations, Berlin 2015, pp.117-131.

Topics: Economy, Capitalism, Corruption From: "Blätter" 4/2021
' Doomed to be a superpower.
Are we living in a virocracy? '
In the April issue, publicist Fabian Scheidler sees technocratic ideology as the central cause of our planetary crisis. Neoconservative thought leader and advisor to the Biden administration Robert Kagan argues that the U.S. must finally accept its role as a global regulatory power. Political scientist Colin Crouch sheds light on the all-too-close relationship between capitalism and corruption. "Blätter" editor Steffen Vogel sees in the identity-political struggles of the present a cultural revolution in the wake of 1968. And journalist Kristin Helberg calls for the Syrian diaspora in Germany to finally be recognized as a social force.
There are undoubtedly serious differences between the German Empire, founded 150 years ago, and the Federal Republic. But there are also surprising parallels.
Blaetter is "An island of reason in a sea of nonsense" Karl Barth
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