Around the world, political and economic liberalisation have gone hand in hand since the early 1980s. However, as more countries turn to populist leaders, could the world be about to fall out of love with free-market economics too?

In an essay entitled ‘The End of History’, published in 1989 as the Berlin Wall was about to  fall, US political scientist Francis Fukuyama famously declared, with the imminent collapse of communism across eastern Europe, the last ideological alternative to liberalism had been eliminated.

What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government

If you imagined history as the process by which liberal institutions – representative government, free markets and consumerist culture – become universal, it might be possible to say history had reached its goal.

While Fukuyama’s thesis provoked no shortage of criticism, the idea the world was indeed moving towards ‘the end of history’ did not seem totally fanciful. For most of the following two decades, it was possible to argue his views were borne out by events.

The collapse of communism rapidly spread beyond Eastern Europe, with Cambodia, Ethiopia, Mongolia and South Yemen among those to abandon the ideology between 1989 and 1991. Having stood at 27 when Fukuyama wrote his article, by 1992 the number of communist regimes had dwindled to just five.

The globalisation paradox

The collapse of communism and corresponding pivot towards democratic governance was widely seen as the logical culmination of a process that had begun a decade earlier. A series of radical reforms initiated by Ronald Reagan and Margaret Thatcher proved to be a catalyst for the widespread adoption of free-market capitalism. Governments around the world privatised state-owned institutions and assets, deregulated markets for both goods and services, encouraged greater labour market flexibility and cut taxes. Perhaps most significantly, reducing impediments to free trade in goods and services and capital flows became the axiom of countries everywhere. 

Illustration of man on top of a pie chart

China provides a useful analytical counterpoint, however. In the unipolar world that followed the end of the Cold War, political theorists assumed the liberalisation of China’s economy would eventually lead to the democratisation of its political system. But that has not happened. While leaders opted to pursue a series of wide-ranging reforms in the 1990s – including large-scale privatisations and the reduction of trade barriers and regulations – in Xi Jinping, China has its most autocratic leader since Mao Zedong. Now, with populist politicians making big strides across Europe, the Americas and beyond, it is as if the West is mimicking China; questioning the same liberal democratic ideals it once hoped the latter nation would adopt.

As to why this is, perhaps it was the eagerness of politicians to uphold the consensus about the merits of globalisation, with little or no concern for the consequences. Unfortunately, sluggish economic growth over the past decade has challenged that by drawing attention to the inexorable rise in inequality that has taken place in much of the West over the last 40 years or so. Voters increasingly see the capitalist system as rigged in favour of political elites, big business and the mega-rich.

As Ian Shepherdson, the founder of Pantheon Macreconomics, an economic consultancy to the financial services industry, told AIQ: “Globalisation has proved to be the definitive example of the law of unintended consequences.

“Few in policymaking circles in developed economies ever imagined it would unleash an unprecedented backlash against the establishment and the basic validity of the capitalist model.”

Is protectionism really the solution?

The gains from globalisation have been spread unevenly

However, even if it is hard to dispute the benefits of globalisation have been spread too thinly, and the process has created issues politicians have been slow to tackle, it is far from clear resorting to protectionism will solve advanced economies’ ills.  

For a start, the fact the gains from globalisation have been spread unevenly does not imply rising levels of international trade have made any country poorer in aggregate. As Harvard professor and former US Treasury Secretary Lawrence Summers wrote in April 2016: “No one thanks global trade for the fact their pay cheque buys twice as much in clothes, toys and other goods as it otherwise would.”2 Hence, it is not intuitive why a reversal of the process will make any country richer. 

Branko Milanovic, an economics professor at City University of New York Graduate Center, estimates that while in relative terms the greatest benefits of globalisation have accrued to a rising “emerging middle class”, based preponderantly in China, the largest gains in absolute terms have gone to the world’s richest one per cent, half of whom are based in the US.3

Even if foreigners are often considered a common foe in troubled economic times, that suggests it is not only ironic for Trump to blame globalisation for his country’s economic woes, but that his policies could have sizeable negative repercussions for the US economy too. 

Moreover, if the arguments of some  are to be believed, protectionism is  an unnecessary policy response.

Cambridge University lecturer Finbarr Livesey believes market forces could be about to lead the world to de-globalise of its own accord. In his 2018 book From Global to Local, he argues with robots becoming ever cheaper and more efficient, replacing cheap workers, manufacturing may well move back closer to where products are consumed in advanced economies.4 If Livesey is correct, inequality within the West may rise further.

Notwithstanding Milanovic’s findings, according to others globalisation has only been responsible for a small amount of the rise in inequality seen in recent years. In his 2018 book Globalization and Inequality, Elhanan Helpman, a professor of international trade at Harvard University, argued: “The chief causes are difficult to pin down, though technological developments favouring highly skilled workers and changes in corporate and public policies are leading suspects.”5

Capitalism’s ethical foundations shattered

Nationalists such as Trump have been largely silent on the need for changing other aspects of the capitalist economic model. However, a growing band of commentators believe more fundamental reform is required. For them, unless the West urgently addresses its twin economic woes of insufficient growth and staggering levels of inequality, together with the looming threat of irreversible climate change, more political upheaval will ensue.

In his 2018 book Can American Capitalism Survive?, Steven Pearlstein, a public affairs professor at George Mason University, claimed capitalism’s ethical foundations have been shattered by radical free-market ideology, or ‘neoliberalism’.6 “We are missing a key tenet of Adam Smith’s wealth of nations: without trust… democratic capitalism cannot survive. Capitalism isn’t dead, but it has to be saved from itself before it is too late,” he argued.

While inequality has been rising across the West, the problem is especially acute in the US. According to Shepherdson, changes in taxation policy have played an important role. For example, he notes the top rate of US personal income tax is now 37 per cent, whereas from the end of World War II until 1982 it was never below 69 per cent.

In 1965 the chief executive-to-worker compensation ratio was 20:1; today it is 312:1

At the same time as tax rates on top earners have plunged, pay differentials have skyrocketed. According to the Economic Policy Institute, a think tank, chief executives of the biggest 350 US firms saw their pay rise by around 1000 per cent between 1978 and 2017. The average worker’s compensation grew just 11.2 per cent over the same period. Whereas in 1965 the chief executive-to-worker compensation ratio was 20:1, and in 1989 58:1, today it is 312:1.7

Figure 1: Change in share of total real income, 1967-2017

The chart above shows over the past half century the richest Americans’ share of the national pie has risen substantially, whereas the slice accruing to the poorest 80 per cent has moved in the opposite direction. While incomes at the 95th percentile mark have risen 94 per cent (1.3 per cent a year) when adjusted for inflation, at the 20th percentile they have risen just 28 per cent (0.49 per cent a year).

Steve Waygood, Aviva Investors’ chief responsible investment officer, says while government intervention is required, investors have an important role to play if the issue of inequality is to be tackled. 

“Unfortunately, although investors are starting to do a better job in encouraging companies to ensure all their employees are paid a living wage, they’ve been far less successful in curbing excessive pay at the top. It needs to be addressed urgently,” he says.

According to some, inequality is likely to accelerate thanks to the rapid pace of development of digital technologies. In their 2014 book, The Second Machine Age, Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology wrote: “There’s never been a worse time to be a worker with only ‘ordinary’ skills… because computers, robots and other digital technologies are acquiring these skills at an extraordinary rate.”8

Illustration of people struggling to get a leg up

Workers whose skills have been mastered by computers have less to offer the job market, and will see their wages and prospects shrink. Entrepreneurial business models, new organisational structures and different institutions are needed to ensure the average worker is not left behind by cutting-edge machines, they argued.

Increases in the inequality of wealth have been even more extreme. That is partly because asset prices have risen far faster than incomes – something especially true over the last decade thanks to the unprecedented easing of monetary policy by central banks. In the US, the slice of national income accruing to labour has fallen by close to ten per over the past 50 years, while the share attributed to corporate profits has risen by a similar amount.9 With the rich owning a disproportionately large percentage of company shares and other assets, it was reported in 2017 the richest one per cent of Americans owned 40 per cent of the country’s wealth – more than the bottom 90 per cent combined.10

Rising industry concentration

Rising inequality between individuals is mirrored by developments in the corporate sphere, with a select group of companies becoming ever more wealthy and powerful. The growing dominance of a few firms is a problem because competition is the lifeblood of any well-functioning capitalist system. Without it, consumers could face higher prices and less choice of products and services, and workers will have fewer job options. Furthermore, since a lack of competition is likely to lead to lower productivity growth, both economic growth and wages will be restrained.

As Harvard economics professor Kenneth Rogoff has put it: “One has to worry that the big five tech firms have become so dominant, so profitable, and so encompassing that it has become very difficult for start-ups to challenge them, thereby stifling innovation.”11

One has to worry that the big five tech firms have become so dominant

The Economist recently reported market concentration had risen in two-thirds of American industries since 1997. This is partly explained by the large volume of takeovers in recent years, which across the West have been worth US$44 trillion since 1998.12

As a result, the free cash flow of companies is 76 per cent above its 50-year average, relative to GDP. A similar, if less extreme, trend can be seen in Europe. On both continents, dominant firms are becoming harder to dislodge. 

The Economist reckoned the global pool of abnormal profits was US$660 billion; more than two-thirds of which was made in America, one-third of that by technology companies.

According to Jonathan Haskel and Stian Westlake, there is a further explanation for rising levels of intra-firm inequality, namely the rapidly growing importance of investment in intangible assets such as design, branding and software. This is partly because unlike a tangible asset such as a factory, intangible investments are radically scalable.

In their book Capitalism Without Capital, they say this has not only enabled the likes of Google, Microsoft and Facebook to grow rapidly, but increased the gap in profitability between winners and losers. With the world dividing into low-paying firms and high-paying firms as a consequence, this is feeding back into income inequality.13

The one-planet problem

Waygood says capitalism has created and is now struggling to come up with a solution to what is arguably the most pressing issue of all: man-made climate change. He says the asset management industry, and its clients, face significant potential losses because of climate change.

“Our own research conducted with the Economist Intelligence Unit estimates the present value of assets at risk between now and 2100 could be as high as US$43 trillion – equivalent to 30 per cent of the entire stock of manageable assets – if global temperatures rise 6°C. These losses will only be magnified if the degree of warming in the world is left unchecked and not brought under control.

“In short, climate change is the greatest collective risk we face. If urgent action is not taken to limit rises in global temperatures quickly and substantially, the long-term environmental disaster will have grave economic consequences for businesses and society,” Waygood says.

As for solutions, he argues that since markets do not price so-called externalities such as carbon emissions and pollution, countries ultimately must work together to tackle it by driving these external costs onto corporate cash-flow statements. They can do this by setting a carbon price via an emissions-trading scheme, setting a tax on carbon, or regulating certain practices out of existence.

While on the one hand it is encouraging supranational institutions and most individual governments have begun to take the issue far more seriously, Trump pulling the US out of the Paris climate accord is worrying, particularly with Brazil, under its new president Jair Bolsonaro, threatening to do the same.

Despite his concern at Trump’s actions, Waygood says there are some grounds for optimism. “In the US, for example, individual states such as California have been helping drive rapid change in new technologies like electric vehicles and renewable energy by providing the private sector with the right combination of incentives and penalties. While capitalism has created some of these problems, it also has a crucial role to play in providing solutions,” he says.

Although Waygood believes in market-based solutions, and while he recognises different countries may head in different directions and at different speeds, on balance he suspects the pendulum is swinging away from unfettered free-market economics and de-regulation and towards government intervention.

“Rising inequality and man-made climate change are two massive market failures. While markets can provide some of the answers, it is clear governments need to take urgent action. Far from undermining the capitalist system, they would be bolstering its long-term productive potential,” he says.

Rising inequality and man-made climate change are two massive market failures

Will countries collaborate or compete?

With Western politics in such a state of flux, predicting the direction in which capitalism is heading is not straightforward. Although, in an ideal world, countries would agree to pull in a similar direction to one another, there is little indication this is likely.

Take the issue of tax reform. It is one of the most obvious tools governments have to address inequality. A Dutch historian recently became an overnight social media sensation after telling an audience at the World Economic Forum in Davos it was a waste of time trying to address inequality and social unrest without first reforming taxation.

“I hear people talking about participation and justice and equality and transparency but then almost no one raises the real issue of tax avoidance and the rich just not paying their fair share. It feels like I’m at a firefighters’ conference and no-one’s allowed to speak about water,” Rutger Bregman said.14

As a 2012 OECD report explained, not only can tax policy play a major role in making income distribution less unequal, it is “crucial for raising revenues to finance public expenditure on transfers, health and education that tend to favour low-income households, as well as on growth-enabling infrastructure that can also increase social equity”.15 The year before, Angel Gurría, the organisation’s secretary-general, had called for countries to make their income tax regimes more progressive, to close tax loopholes, and eliminate tax havens.16

However, while some nations may choose to raise taxes, reversing the trend of the past 40 years, it is unlikely all will. The temptation for others will be to try to lure businesses and highly skilled workers by cutting them. After all, belief in so-called trickle-down economics – the idea taxes on businesses and the wealthy should be reduced to stimulate business investment in the short term, benefitting all of society in the long term – remains deeply ingrained in the West, especially the US.17

Recent changes in US tax policy are a prime example. Trump appears to recognise inequality is a problem and tax has a role to play. For instance, when he signed the Tax Cuts and Jobs Act into law in December 2017, he claimed middle-class workers would see a pay increase of US$4,000 to US$9,000 and the richest Americans wouldn't gain “at all” under the plan.

The reality has been somewhat different. According to William G. Gale, co-director of the Urban-Brookings Tax Policy Center, which aims to provide independent analysis of tax issues, most middle-class taxpayers have seen only a modest boost from lower tax rates. The biggest benefits went to the rich and “increased the inequality of income”.18

Radical, but perhaps unrealistic, solutions have been proffered in the recent past. In his best-selling 2013 book, Capital in the Twenty-First Century, French economist Thomas Piketty argued the main driver of inequality – the tendency of returns on capital to exceed the rate of economic growth – threatened to generate extreme inequalities. He said a possible remedy was a global wealth tax.19 However, while a wealth tax may sound good on paper, global co-operation would be required for it to be effective. The likelihood is that if any country were to introduce such a tax in isolation, its wealthier citizens would attempt to shift their assets abroad. 

The same issue applies to efforts to close corporation tax loopholes. Tax accountants have become adept at finding mismatches between tax rules in different countries, helping multinationals relocate valuable assets internationally to minimise their tax. The digital economy – in which companies can do business in countries while having little or no physical presence there – has also encouraged such behaviour.

In 2013, the OECD – a group of mostly rich countries – set up a project to combat tax avoidance by multinationals. Although it claims to be making progress in its drive to get countries to collaborate, once again there is a strong temptation for countries to undercut one another. For example, Paul Ryan, who at the time was Speaker of the US House of Representatives, claimed in 2015 the OECD’s proposals amounted to an “attempt to basically grab a tax base of our domestic corporations”.20 Witness too the difficulties the EU is having to get member states to agree a plan to tax US technology giants such as Google (Alphabet), Amazon and Facebook on their revenues instead of their profits. 

Shepherdson believes that, while it may make sense for governments to tax companies more heavily if they wish to reduce inequality, without international co-operation there is every likelihood corporate tax rates will continue to fall. According to The Tax Foundation, a US think tank, in 2017 the average corporate tax rate across 202 jurisdictions was 23 per cent, down from 39 per cent in 1980. It seems certain much of that fall can be explained by globalisation, as countries vied with one another to entice multinational corporations to their shores.21

Labouring the point

Given these problems, politicians for now seem to be focusing on labour markets. In Australia, for example, the government in 2011 introduced a ‘two-strikes rule’, whereby the entire board of a company is removed if 25 per cent of shareholders reject its remuneration report two years running. In 2018, UK Prime Minister Theresa May said she would improve the rights of millions of workers, including those in the so-called gig-economy, promising them better holiday and sick-pay rights and stronger contracts. She also pledged a crackdown on firms using unpaid interns and to hike fines for companies if they mistreat staff. 

Labour Party leader Jeremy Corbyn has proposed government contracts should only be awarded to firms with acceptable pay ratios.

Politicians on the left want to boost labour in other ways, too. Across the West there have been calls for the decline in the power of trade unions to be arrested.  In the US, the Accountable Capitalism Act proposed by Senator Elizabeth Warren, a potential candidate in the 2020 presidential election, would require employees to elect 40 per cent of a board of directors of any corporation with over US$1 billion in revenues.22  

As for addressing industry concentration, Waygood says regulators, particularly in the US, need to have more powers to investigate markets that are becoming dysfunctional. He believes big US technology companies face increasingly closer scrutiny around the world. That is especially true of Google, Twitter and Facebook, given they are being blamed for abusing private data, permitting fake accounts to peddle fraudulent products and disinformation, and failing to stop interference in Western politics.

According to Rogoff, perhaps the most urgent intervention is to weaken Big Tech’s grip on personal data. He says with its new General Data Protection Regulation, the EU has shown one possible path forward. It gives consumers – albeit only those in the EU – much more control over their personal data held by firms. Eric Posner and Glen Weyl go one step further. In their book Radical Markets, the US academics propose forcing digital monopolies to compensate people for their electronic data.23

Veering to the left?

Although nationalist politicians have reaped the biggest electoral rewards by deflecting voters' anger towards immigration and foreign trade, there are signs a growing number in the West wish to see less free-market economics rather than more of it.

With electorates increasingly polarised, politicians from the left end of the political spectrum have been capturing votes. 

Nationalists have reaped electoral rewards by deflecting voters’ anger towards immigration

In Bernie Sanders, Jeremy Corbyn and Jean-Luc Mélenchon, electorates in the US, Britain and France have in recent years turned in surprisingly large numbers to candidates running on what were once considered extremely left-wing agendas.

Support for these politicians was especially strong among younger voters. In Sanders’ case that is perhaps not so surprising when one considers a 2018 Gallup poll found more Americans aged 18-29 had a positive view of socialism than of capitalism, with support for the latter ideology having plunged by a third since 2010.24

Having said that, it is not always obvious those being surveyed have a clear and consistent understanding of ‘socialism’. Sanders himself seems to have changed his view over the years. A young Sanders once praised socialist governments in Cuba and Nicaragua, but during his 2016 presidential campaign, stated: “When I talk about democratic socialism, I’m not looking at Venezuela. I’m not looking at Cuba. I’m looking at countries like Denmark and Sweden.”25

Part of the reason for the confusion is no country in the world practices free-market economics in its purest form. Government intervention is found in varying degrees in all countries where private capitalism is the primary engine of production. 

Danish Prime Minister Lars Løkke Rasmussen responded to Sanders’ remarks by saying: “I know that some people in the US associate the Nordic model with some sort of socialism. Therefore, I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.”26 In fact, since the 1980s Denmark has moved away from socialist policies, privatising several sectors and deregulating many others.

History is alive and kicking

In an interview shortly after Trump’s inauguration, Fukuyama conceded he had been wrong. Far from ending with the fall of the Iron Curtain in Eastern Europe, history was alive and kicking.27

“Twenty-five years ago, I didn't have a sense or a theory about how democracies can go backward. And I think they clearly can,” wrote the man who was a key contributor to the formulation of the so-called Reagan Doctrine and an important figure in the US neoconservative movement. 

He went on to say in 2018: “This extended period, which started with Reagan and Thatcher, in which a certain set of ideas about the benefits of unregulated markets took hold, in many ways it’s had a disastrous effect.”28

Yet, as we have seen, this debate is not about extremes; the limitations of either end of the spectrum have been clearly exposed. In this age of Big Data, the complexity associated with millions of households making billions of choices to which governments and companies could never respond perfectly is evidence enough against the notion of central planning in its entirety. Equally though, the role of the public sector in, not only producing social goods such as education, healthcare and infrastructure, but also in funding innovations such as the Internet and core technology underpinning the smartphone, undermines the case for unfettered free markets.

It therefore seems improbable any country will abandon capitalism any time soon, particularly since mistrust of big government remains deep-seated in much of the West. Although some have pondered whether China’s economic success – not least the fact it emerged from the financial crisis relatively unscathed – will lead people to debate whether the country has established a new model of economic development, that seems unlikely.29 After all, a Pew Research Center poll in 2014 found 70 per cent of Americans still believed people were better off in a free-market economy. The number in Germany was even higher at 73 per cent and the UK came in at 65 per cent.30

Our temptation to focus on headline-grabbing change is notorious. It is what populists feed off. The reality of today, however, seems not to be a fundamental attack on capitalism per se, but more a challenge to its philosophical and ethical underpinnings. Capitalism as an organising system for society has proved its resilience throughout the last 100 years. To ensure it does so for the next 100 and beyond, it will need to reconnect with its core purpose: the people it is meant to serve. This will necessitate a better approach to distribute wealth, deal with regional and nationalist instincts, and, perhaps most importantly of all, tackle climate change head on.

Capitalism will need to reconnect with its core purpose: the people it is meant to serve


  1. Francis Fukuyama, ‘The End of History?’, The National Interest, Summer 1989.
  2. Lawrence Summers, ‘Global trade should be remade from the bottom up’, The Financial Times, 10 April 2016.
  3. Branko Milanovic, Global inequality: A new approach for the age of globalization (Harvard University Press, 2016).
  4. Finbarr Livesey, From Global to local: The making of things and the end of globalization (Profile Books, 2017).
  5. Elhanan Helpman, Globalization and inequality (Harvard University Press, 2018).
  6. Steven Pearlstein, Can American capitalism survive? (St. Martin’s, 2018).
  7. Source: Economic Policy Institute.
  8. Erik Brynjolfsson and Andrew McAfee, The Second Machine Age (WW Norton, 2014).
  9. Source: Macrobond.
  10. ‘Nation’s top 1 per cent now have greater wealth than the bottom 90 per cent’, Washington Post, 8 December 2017.
  11. Kenneth Rogoff, ‘Big Tech is a big problem’, Project Syndicate, 2 July 2018.
  12. 'The next capitalist revolution,’ The Economist, 15 Nov 2018.
  13. Jonathan Haskel & Stian Westlake, Capitalism without capital (Princeton University Press, 2017)
  14. Source: Twitter
  15. Alan Carter and Stephen Matthews, ‘How tax can reduce inequality,’ OECD Observer No 290-291, Q1-Q2 2012
  16. Angel Gurría, ‘Tackling inequality’, OECD Observer No 287 Q4 2011.
  17. Joseph Stiglitz, ‘Why tax cuts for the rich solve nothing’, Project Syndicate, 27 July 2017.
  18. William Gale et al., ‘Effects of the Tax Cuts and Jobs Act: A preliminary analysis’, The Brookings Institution, 14 June 2018.
  19. Thomas Piketty, Capital in the twenty-first century (Éditions du Seuil, 2013).
  20. ‘Paul Ryan on the prospects for a tax overhaul’, The Wall Street Journal, 21 June 2015.
  21. Kari Jahnsen & Kyle Pomerleau, ‘Corporate income tax rates around the world’, The Tax Foundation report, September 2017.
  22. ‘Warren introduces Accountable Capitalism Act’, Elizabeth Warren Press Release, 15 August 2018.
  23. Eric A. Posner & E. Glen Weyl, Radical markets: uprooting capitalism and democracy for a just society (Princeton University Press, 2018).
  24. ‘Democrats more positive about socialism than capitalism’, Gallup, 13 August 2018.
  25. ‘Bernie Sanders: Democratic socialism isn’t Cuba and Venezuela…,’ Real Clear Politics, 19 February 2016.
  26. ‘Denmark’s prime minister says Bernie Sanders is wrong to call his country socialist’, Vox, 31 Oct 2015.
  27. ‘The man who declared the ‘end of history’ fears for democracy’s future’, Washington Post, 9 February 2017
  28.  ‘Francis Fukuyama interview: “Socialism ought to come back”’, New Statesman, 17 October 2018.
  29. ‘Is China’s growth model a threat to free-market economics?’, The Economist, 13 June 2018.
  30. Source: Pew Research Centre.