The Route Out of the Failures of Capitalism

By Graham Vanbergen: Over the last four to five decades, Western democracies have been enthralled by the promise of capitalism: economic growth, innovation, and prosperity for all. It was a seductive vision, one that seemed to vindicate the system’s superiority over other economic models. Yet today, we find ourselves grappling with a starkly different reality. Inequality has soared, living standards for the average citizen have stagnated or even declined, and democracy itself is increasingly fragile. As I have argued in The Vanbergen Column in The European Financial Review, capitalism, in its current incarnation, is failing to deliver on its promise—and this failure is reshaping the political landscape in profoundly troubling ways. But there is a route out of this failure.

 

The Failures of Modern Capitalism

Capitalism’s foundational tenet is that free markets, driven by competition and innovation, generate wealth that benefits society as a whole. However, this idea rests on the assumption that the rewards of growth are reasonably and equitably distributed. In practice, globalisation, financialisation, and technological advancements – hallmarks of modern capitalism, have disproportionately benefited a narrow elite while leaving the majority behind.

In the United States, for example, the top 1% of earners have seen their share of national income more than double since the 1980s, while real wages for most workers have barely budged. A similar dynamic is at play in the UK and other countries in Europe, with wealth inequality now mirroring levels not seen since the pre-World War I era. Across Europe, austerity policies following the 2008 financial crisis deepened economic divides, gutting public services and leaving communities to fend for themselves. This economic polarisation has eroded the middle class – the bedrock of democratic stability and bred bitter resentment among an electorate seeking some sort of change.

A team of Finnish scientists hired by the UN Secretary-General asserted in its report that capitalism as we know it is moribund, primarily because it focuses on short-term profits and fails to look after the long-term needs of people and the environment, which is being subjected to unsustainable exploitation.

 

The Political Fallout: Populism and Polarisation

This growing inequality has provided fertile ground for the rise of right-wing populists, who exploit public discontent by blaming immigrants, minorities, and global institutions for the failures of capitalism. Figures like Donald Trump in the United States, Marine Le Pen in France and Viktor Orbán in Hungary have surged to prominence by promising to “take back control” and restore a sense of national pride. Boris Johnson’s Brexit was a classic case in point – all promises with its ideological foundations built on a raft of lies.

What is often overlooked, however, is how these leaders weaponise the very economic grievances that capitalism has created. By framing economic insecurity as the result of cultural or external threats rather than systemic inequality, they deflect attention from the real culprits: the unchecked power of corporations, deregulation, and tax policies that disproportionately benefit the already very wealthy. This sleight of hand erodes democratic norms as populist leaders attack institutions, stoke division, and consolidate power under the illusory guise of defending the “will of the people.”

 

The Decline of Living Standards

One of the most striking indicators of capitalism’s failure is the decline in living standards for large swaths of the population. In many Western democracies, the promise that each generation would be better off than the last has been shattered. Housing affordability is at crisis levels, healthcare systems are buckling, and secure, well-paying jobs are increasingly out of reach.

In Britain, for instance, real wages have experienced one of the slowest recoveries in modern history following the financial crisis. In the United States, life expectancy has declined for the first time in decades – a grim statistic that underscores the human toll of economic and social dislocation. These trends are not anomalies; they are the inevitable outcomes of a system that prioritises shareholder profits over societal well-being.

 

Capitalism Undermining Democracy

Democracy, as a political system, relies on the belief that governments act in the interests of their citizens. Yet when economic power is concentrated in the hands of a few, political power often follows. In the United States, the outsized influence of corporate lobbying has distorted policymaking, ensuring that the interests of the wealthy dominate the political agenda. Across Europe, similar dynamics play out as powerful industries push for deregulation and tax cuts while public investment in infrastructure, education, and healthcare stagnates.

This erosion of trust in democratic institutions creates a dangerous feedback loop. As citizens lose faith in their government’s ability to address economic inequality, they become more susceptible to authoritarian narratives promising quick fixes. The result is a slow but steady hollowing out of democracy itself.

 

Rethinking the Role of Capitalism

If we are to reverse this trajectory, we must rethink the relationship between capitalism and democracy. This requires not only addressing economic inequality but also reimagining the purpose of markets. Instead of prioritising short-term profits, we must focus on long-term investments in people and communities. Policies such as progressive taxation, stronger labour protections, universal basic services, and stricter regulations on corporate monopolies are essential steps toward a more equitable system.

Moreover, we need to hold political leaders accountable for perpetuating the myths of trickle-down economics and unfettered free markets. The resurgence of civic engagement—from grassroots movements advocating for climate action to campaigns for workers’ rights—offers a glimmer of hope. These movements demonstrate that change is possible when citizens demand a more inclusive and equitable vision for society.

 

Ways Forward

There are different visions of the way forward, but identifying what is wrong first – should be the driver of the fundamentals of change. Economists agree that change should at first look at our labour markets.

Steven Pearlstein is the Robinson Professor of Public Affairs at George Mason University and has worked for members of both the US House and Senate. “What’s needed is a new business norm that says all workers should share in the success of their companies, with government playing a supporting role, nudging things in the right direction.”

Heidi Shierholz is policy director at the Economic Policy Institute and served as chief economist at the US Department of Labor. “We have chosen policies that hamstring the bargaining power of working people, channelling economic growth away from workers and toward the wealthy. Rejecting the myth that rising inequality is a foregone conclusion in a modern economy is the first step towards getting to the real work of addressing the policy-driven power imbalances that have resulted in an economy that works for the few and leaves the rest behind.”

A paper published by the London School of Economics points out that Britain needs to – “address the catastrophic disjuncture that enabled cut-throat competition at the bottom end of the labour market while shielding from competition those areas where monopoly capital and entrenched rentier interests have become powerful veto players.”

 

 

Confronting Capitalism’s Flaws

The failures of capitalism in Western democracies are not merely economic; they are existential for functioning democratic systems. Rising inequality, declining living standards, and the erosion of democratic norms are interconnected crises that threaten the stability of our societies. And whilst capitalism has consistently failed the poor, it is now failing the so-called middle classes.

The London School of Economics points out that – “Half of the UK population have less than 5 per cent of the total wealth stocks, whereas the top 10 per cent take 57 per cent. The result is a dramatic extension of the distance between rich and poor, leading to the festering of social divides of numerous kinds.”

Suppose we continue down this path, as witnessed by the rise of right-wing movements in countries such as America, Italy, Germany, France, Austria, Switzerland, Finland, Sweden, the UK and more. In that case, the future will be marked by deeper divisions, greater authoritarianism, and weaker democracies.

We must confront the systemic flaws of capitalism and demand a new economic paradigm – one that prioritises fairness, sustainability, and democracy over the narrow interests of a powerful economic elite. Only then can we hope to fulfil the promise of a system that works for everyone, not just those pulling the strings.

The big problem is moving that paradigm. Look at the lobbying groups, corporate leaders, and business groups that are shouting loudly over Labour’s most recent budget regarding the increase in employer National Insurance contributions. And yet, since 1990, UK corporate profits have risen 20 per cent as a percentage of GDP, whereas real wages have, in effect, flatlined, especially in the last 25 years.

The time for action is now before it is too late – before democracy becomes so tested that it fractures and starts a process of disintegration. Imagine that this Labour government fails to impress the electorate enough at the next general election, and a coalition between the Conservatives and the Reform Party is ushered into Downing Street. Imagine Nigel Farage is either Prime Minister or Chancellor of the Exchequer. It is easy to imagine the chaos after what was witnessed with Boris Johnson, Brexit, and the sheer scale of corruption, cronyism and general malfeasance of public office. In America, a convicted fraudster, a man who attempted to overturn a US Presidential election with a long list of criminal indictments, is about to move into The Whitehouse.

Nothing is too extreme a thought. The pendulum has swung too far, and now is the time to accept our nation’s position.

 

 

 

 

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