If capitalism undermines democracy (Lindblom, see Politics and Markets 1) and democracy undermines capitalism (Schumpeter, see Politics and Markets 2) then how can we make them compatible?
That is the question we face today: authoritarian capitalism, democratic socialism OR democratic capitalism?
Fareed Zakaria recently wrote The Lessons Democrats need to learn to win again. The article explains how we might avoid the pessimism expressed by both Lindblom and Schumpeter. It is a lesson many economists (Keynes, Galbraith, Samuelson) taught over the past century. The most important living writers on the politics–markets relationship are Piketty, Stiglitz, Rodrik, Acemoglu & Robinson, Mazzucato, Chang, Milanović, and Hacker/Pierson — economists and political scientists who argue that markets are powerful, but democracy must deliberately shape them to avoid oligarchy and social collapse.
Economist Alan Blinder put forth this argument in his 1987 book Hard Heads, Soft Hearts. The solution is not pure free markets (Friedman, Hayek), nor corporate-dominated democracy (Lindblom), nor socialist evolution (Schumpeter) but managed democratic capitalism. Unfortunately, Blinder’s solution is easier to imagine than to implement.
Blinder believes capitalism can survive in the long run only if democracy civilizes it — hard heads for efficiency, soft hearts for fairness. Blinder wrote against two extremes: pure free-market ideology and anti-market socialism and communism. He argues we must be hard-headed about efficiency and soft-hearted about fairness and democratic values.
Markets are powerful and efficient. Competition works, prices carry information, innovation flourishes in a free and competitive market, government planning cannot substitute for markets.
(Blinder might say: Zohran Mamdani, the newly elected mayor of New York, is wrong in his boast that “there is no problem too large for government to solve.” Blinder is a pragmatic centrist who believes in sustainable reform of capitalism not in its replacement by socialism. He would also argue with Mamdani’s statement that “there is no concern too small for it [government] to care about.” Blinder does not believe government should be a micro-manager of the economy.) However, Blinder does believe unregulated markets produce inequality, fail to provide healthcare and education, leave vulnerable people behind, and can therefore destabilize democracy.
For that reason, Blinder supports social welfare, progressive taxation, universal health insurance, strong education systems, public investment and worker protections. He agrees with the free marketeers on efficiency and the social democrats on fairness.
According to Blinder, capitalism can survive but only as truly democratic capitalism with a robust social contract. This is essentially the Nordic or German model: a market economy with a strong welfare state, open trade, independent courts, regulated finance, high education investment, strong unions and civic associations. Blinder points to the United States after WWII and to Northern Europe as proof.
Recently, as culture and class have become the fault lines across democracy with the explosion of social media, implementing Blinder’s ideas have become more difficult. The world is changing ultra fast especially with AI. Emotions, not facts, dominate political discussions. Authoritarians have exploited a growing populism to create an anti-elitist culture where “professors are the enemies” along with media, professionals, and the arts.
It is unclear if countervailing institutions can prevail in this new climate. Implementing campaign finance reform, regulating monopolies, antitrust enforcement, maintaining transparency, allowing for unions and public goods has become more difficult to champion in the current atmosphere. Democracy can discipline capitalism, but only if it is given a chance.
Blinder believes it is possible to tax without killing incentives, regulate without crushing innovation, and redistribute without abolishing markets. Capitalism may be politically and economically sustainable if governments are intelligent and humane. If not, both capitalism and democracy may be doomed as Lindblom and Schumpeter argued long ago.
There is some support for Blinder’s “hard heads, soft hearts” model. Long-term stable democratic capitalism has survived in Scandinavia, Germany, the Netherlands, and Canada. However, growing inequality in the United States, concentrated corporate power, declining unions, and money in politics are proof that Lindblom’s pessimism must still be reckoned with.
From 1945–1975, the United States showed that a successful democratic-capitalist welfare state is possible. Taxes were high but economic growth was rapid. The GI Bill, powerful unions, and massive infrastructure investments allowed for a rising middle class, falling inequality, and strong economic mobility. The system broke down not because diversity increased, but because of deregulation, tax cuts for the wealthy, the decline of unions, the financialization of the economy, and corporate political mobilization.
The real obstacle to democratic capitalism in the United States is not diversity, it’s politics. Extremes are rewarded and compromise punished. Corporate money has become dominant (campaign spending, lobbying). Public distrust of government and inequality are at high levels. At a time when person to person contact is more important than ever, AI is positioning to replace people with machines.
We are in control of our future. Politics and markets are not relentless inexorable tides that pull us along. They are systems we develop to benefit all of us. We’ve done it before and we can do it again.