Democracy in Peril: The Decline of Institutions and the Rise of Populism

Western democracies are experiencing a profound crisis. The institutions that forged prosperity are crumbling, leaving the field open to populist sirens from all sides. How did they get here?

Acemoglu and Robinson demonstrated in their major work "Why Nations Fail" that the key to Western success lies in its inclusive political and economic institutions. By broadly distributing political power and economic opportunities, they created a virtuous circle of progress and innovation. Prosperity is not the result of chance, but of a subtle balance between state and market, between freedom and regulation.

This balance was broken by the ultra-liberal turn of the 1980s. Under the guise of freeing market energies, counter-powers were weakened, and wealth and influence were concentrated in the hands of an elite that snubs national borders and tax jurisdictions. The concentration of capital and the increasing financialization of the economy perfectly illustrate this drift. The S&P 500, a flagship index of the American stock market: in 1980, the top 10% of companies represented about 20% of the total capitalization. Today, this figure exceeds 30%.

Thomas Piketty, in his masterful work "Capital in the Twenty-First Century," provides crucial insight into the mechanisms of capital concentration. With the return on capital exceeding the growth rate since this ultra-liberal turn, asset holders see their wealth grow faster than the economy as a whole. This phenomenon generates a spiral of concentration: large fortunes reproduce faster than new wealth is created, leading to an ever-increasing accumulation of capital in the hands of a minority. This trend had been reversed by the inclusive economic policies that followed World War II. The return to this dynamic of concentration largely explains the explosion of inequalities observed since the 1980s and jeopardizes the democratic social contract.

This trend is accompanied by the dizzying rise of asset management giants. BlackRock, the largest of them, now manages more than $10 trillion in assets, equivalent to the combined GDP of France, Germany, and the United Kingdom. This excessive financial power translates into considerable political influence, far from the democratic ideals of the institutions that generated the unparalleled prosperity of the West.

In her striking book "Makers and Takers," Rana Foroohar presents an alarming assessment of this financialization. She demonstrates how the financial sector, supposed to serve the real economy, has become an end in itself. A large part of financial institutions, instead of financing innovation and growth, now favor short-term speculative activities. This drift has devastating consequences: it diverts capital from productive investment, stifles innovation, and exacerbates inequalities. Foroohar also highlights how this excessive financialization has corrupted the corporate world, pushing leaders to favor share buybacks and mergers and acquisitions over investment in research and development or human capital.

The result? An "elite secession" that dreams of being global citizens, despises cultures and national borders they see as relics of the past, views taxes as a confiscation of the fruit of their "merit," and co-opts a political elite under influence and often from the same social backgrounds and educational institutions. Meanwhile, the middle and working classes see their standard of living stagnate and their political voice weaken. The resulting sense of powerlessness and abandonment fuels populism on both the right and the left. Their simplistic promises appeal to a disillusioned electorate, ready to sacrifice democratic gains on the altar of radical change.

The paradox is cruel: by undermining the very foundations of its success - its inclusive institutions - the West is jeopardizing its future prosperity. The temptation of identity withdrawal on the right or rampant statism on the left will only accelerate this decline.

The urgency is to rebuild a balanced social contract. This requires strengthening democratic institutions, better economic regulation, and a resolute fight against the economic, geographical, and cultural secession of the elites. Only at this price can the latter reconcile with the rest of society and cut the ground from under the feet of populism.

The challenge is immense, but so is the stake: it is nothing less than saving the Western democratic model. History will judge the Western elites on their ability to meet this challenge.