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CHAPTER 3

The Rise and Decline of Liberal Capitalism

Liberal capitalism weakened and dissolved the feudal order, allowing a robust middle class to rise. More efficient agricultural practices brought growth into the static economies that had mostly benefited rentiers and inheritors, gradually lifting small property owners such as the English yeomanry. Commercial growth empowered the innovative, aggressive, risk-taking entrepreneurs. New technology, expanding trade, new ideas, and developing institutions transformed feudal society beyond recognition. Where class privilege remained in place over a shifting base, particularly in France, the Third Estate rose up in a violent assault on the last vestiges of feudalism.¹

The entrepreneurs who chipped away at the feudal order did not generally come from the nobility, who in some cases were prohibited or socially discouraged from engaging in commerce.² Aristocratic elites did sometimes give valuable funding and sponsorship to entrepreneurs, many of whom were from groups that had long been persecuted, including itinerant workers and dissenting Protestants, as well as Jews.³ These commercial risk takers played a major part in creating our modern world, as their technological improvements, opening of trade routes, and building of cities ushered in an era of unprecedented economic growth.⁴

Liberal capitalism laid the basis for Western economic hegemony. In the year 1000, the gross product of China and of India each easily exceeded that of all western Europe combined, and the same was true of the Islamic empire. China remained ahead of Europe in technology until around 1450, according to Joseph Needham. For example, Chinese junks were the world’s most advanced ships in the thirteenth and fourteenth centuries, spreading the Middle Kingdom’s influence throughout Southeast Asia and beyond. As late as the seventeenth century, India and China were not only more populous than Europe but enjoyed an industrial infrastructure that was equal, at the very least.⁵

The rise of liberal capitalism first in Europe and then in North America dramatically altered the picture. From 1500 to 1913, Europe’s share of global GDP rose from 17.8 to 33 percent, while China’s share dropped from 25 to 8 percent. By 1913, Western Europe’s per capita GDP was roughly seven times that of China or India, while the per capita GDP of the United States surpassed that of these large and venerable nations by a factor of nine.⁶ In the later twentieth century, the benefits of liberal capitalism spread to East Asia as well, fueling the success of Japan and South Korea, Taiwan, and Hong Kong.

China Challenges the Liberal Model

The recent ascent of China presents a serious challenge to liberal capitalism as the model for the global future. China’s share of the world’s economic output has grown dramatically, from 4 percent in 1990 to a projected 21 percent in 2022.⁷ Even if this progress slows due to demographic, environmental, and other factors, Chinese is likely to reshape much of the world’s economic future with its model of state-directed capitalism, or “socialism with Chinese characteristics.”

China’s rise is occurring outside the realm of normative Western capitalist values. Unlike Japan in the late twentieth century, China never accepted the primary lodestars of liberal civilization, such as individual political and property rights. Instead, it has developed an alternative to liberal capitalism, and its principles are not only being inculcated in its own population but also being exported to universities and governments around the world.⁸

China’s new model of capitalism has profoundly antiliberal aspects, including a distinct sense of social hierarchy, an autocratic central state, an enforced ideology and thought control. Despite a formal adherence to Marxist and Maoist egalitarianism, China today is nurturing a stratified class order, as powerful business elites and their allies in the government construct a system of permanent caste privilege.⁹ The state employs ever more intrusive technology to impose strict censorship, with few protections of privacy.¹⁰ “If the U.S. has long sought to make the world safe for democracy,” suggests one analyst, “China’s leaders crave a world that is safe for authoritarianism.”¹¹

China’s blending of capitalism with authoritarianism is emerging as a persuasive model for economic development. The Chinese model is spreading its influence around East Asia and farther afield, not only in Central Asia but also in South America, parts of Europe, and especially Africa, where there are now an estimated one million Chinese residents. Many people in these countries take inspiration not from the example of New York or London or even Tokyo, but instead from the “Beijing consensus.”¹² Most residents of India, the world’s largest democracy, believe that China will replace the United States as the world’s dominant country within twenty years. At the same time, India’s political leadership is adopting illiberal views and policies, including ethnic nationalism, suppression of free speech, and Hindu dogmatism expressed in public policy.¹³

Back to Stagnation

As China’s power has waxed, the economies in most advanced countries have stagnated. After a period of rapid expansion, economic growth in the large advanced countries, with the occasional exception of the United States, has slowed to a rate no more than half that of a generation ago.¹⁴ Gains in productivity in the last decade were barely half those in the previous decade and barely one-fourth the average increases between 1920 and 1970. The economist Robert Gordon notes that the newest wave of technology, while dramatically changing how we communicate and get information, has done very little to improve the material conditions of life, particularly in housing and transportation.¹⁵

The slowdown of population growth, especially in high-income countries, is another aspect of societal stagnation. In Europe, low birth rates have been common for almost a half century now. Europe’s population is on track to fall from 738 million to roughly 482 million by 2100. Retirees in a shrunken Germany will then outnumber children under the age of fifteen by a ratio of four to one.¹⁶

The demographic decline in East Asia has been, if anything, more dramatic. Over the past few decades, fertility has dropped precipitously in China, Taiwan, South Korea, Hong Kong, and Singapore, all with birth rates now well below replacement level.¹⁷ Perhaps the most extreme case is Japan, where the decline had started by the 1960s. If the current trend continues, the island nation’s population will drop from 127 million to under 80 million by 2065, according to Japan’s National Institute of Population and Social Security Research.¹⁸

The Chinese population is projected to start declining too. By 2050, China is expected to have 60 million fewer people under age fiteen, a loss approximately the size of Italy’s total population. At the same time, China will have nearly 190 million more people who are age 65 and over, approximately equal to the population of Pakistan, the world’s fourth most populous country. The ratio of retirees to working people in China is expected to have more than tripled by then, which would be one of the most rapid demographic shifts in history.¹⁹

The global demographic trend will reshape economies and societies going forward. Today a majority of the world’s people live in countries with fertility rates well below replacement level.²⁰ This number will grow to 75 percent by 2050, according to the United Nations; many societies, including some in the developing world, can expect a rapidly aging population and a precipitous decline in workforce numbers.²¹ Overall world population growth could all but end by 2040, says Wolfgang Lutz, and be in decline by 2060.²²

Shrinking populations in advanced countries will threaten economic growth by limiting the size of the labor force, and will undermine the fiscal viability of the welfare state.²³ This is one reason for the receptiveness of Western governments to high levels of immigration from poorer countries, which continue to produce offspring more prodigiously than wealthier countries. Between now and 2050, half of all global population growth is expected to take place in Africa.²⁴ A widening demographic imbalance between the poorer and wealthier countries could cause more disruption in both spheres, and lead to a reprise of the mass migrations that did much to undermine the ancient empires of Europe and Asia.²⁵ Social conflict resulting from high levels of immigration from poorer countries is already a prominent feature of Western politics and seems likely to fester in the coming decades.²⁶

The Technology Gap

Technological advances once fueled growing prosperity for the many. Today, automation and the use of artificial intelligence promise to accelerate social divisions both between and within countries. Although it is not clear that these technologies will result in fewer jobs overall, some sectors are especially threatened, notably manufacturing, transportation, and retail—sectors that historically provided steady blue-collar employment. But jobs in those sectors may be even more threatened by regulatory changes, largely justified on environmental grounds, that restrict growth in tangible industries.²⁷

What is more likely than mass unemployment in the Western world is a continuing decline of the middle class, as many are forced to subsist in the so-called “gig economy.” Between 2005 and 2014, the percentage of families with flat or decreasing real incomes rose to over 60 percent in the twenty-five most advanced economies.²⁸

A technologically driven society tends to show a widening gap between the “elect” who are highly gifted in science and tech, and the many who are not. Today it takes only a small cadre of coders, financial experts, and marketing mavens to build a billion-dollar business, without much required in the way of blue-collar workers or even middle managers. In the long run, we could see something of the stark future depicted in The Time Machine by H. G. Wells. “We are turning into two races,” writes Richard Fernandez: “Eloi who play video games and Morlocks who program them.”²⁹

In the face of these social challenges, the intellectual classes in the higher-income countries—in the universities, the media, and the arts—almost universally seek to deconstruct the values that guided their countries’ ascent and provided the foundation for widespread prosperity. Instead of concerning themselves with addressing the consequences of economic stagnation—more poverty, social immobility, class conflict—many in the clerisy and even the oligarchy promote the ideal of “sustainability” over broad-based economic growth.³⁰ Just as the medieval clergy preached against materialism, leading figures in today’s academia and the media, and even some among the corporate elite, look askance at the very idea of a dynamic economy, a spirit of innovation, and a commitment to improving everyday life. Some even suggest that progress is a myth.³¹ In this way, the clerisy reinforce the pessimistic notion that upward mobility is a relic of the past, and that our primary tasks now are to redress social grievances and protect the environment, rather than seek ways to spread wealth and opportunity.³²

The new feudalism won’t feature intrepid knights in armor or fortified castles, or raise soaring cathedrals filled with liturgical chants. Instead it will boast dazzling new technology, and be wrapped in a creed of globalism and environmental piety. Yet for all its modernity, the coming age looks set to replace liberal dynamism and intellectual pluralism with an orthodoxy that puts a premium on stasis and accepts social hierarchy as the natural order of things.