Breaking the logic of "us against them"

To break the "us against them" logic, the distribution conflict must be resolved. Instead of fighting for larger pieces of a pie that remains the same size – or is even shrinking – the pieces must become larger for everyone.

Tragically, populism achieves exactly the opposite: the analysis by Funke, Schularick, and Trebesch shows very clearly that populist-led governments around the world have caused economic growth to decline since 1900. In other words, they feed on conflicts over distribution, but instead of resolving them, they exacerbate them. And not only that: they fail to deliver on all their key promises. Per capita growth, the most important indicator of prosperity, is falling, while debt and inflation are rising. Moreover, the battle for distribution against "the elites" does not lead to less income inequality.  Even in the long term, the wage share remains unchanged under populist governments. There is a risk of a populist vicious circle: the intensifying distribution struggle is being fueled more and more in order to maintain power.

What's more, the noticeable losses in prosperity are continuing to affect people's own portfolios. As our calculations show, stock market performance after populists come to power is consistent with per capita growth. This means that, on average, the respective stock markets underperform in comparison to the global stock market as a whole. What is bad for growth and prosperity is ultimately also bad for capital investment.

As Acemoglu, Restrepo, and Robinson, among others, have shown, there is not only a positive correlation between democracy and economic growth, but also a causal relationship: the higher the degree of democracy, the higher the economic growth. And a cross-country comparison shows that the more democratic countries are, the more market-oriented their economies are. The circle is complete. A first step toward more growth and thus less polarization would therefore be to strengthen institutions and, with them, democracy. Trust in the law, including property rights and the separation of powers, are key institutions in this regard. But so too is competition, which prevents the concentration of power, whether in companies or in the state.

The "open society," as democracy can be described in Popper's style, needs an "open economy" (see figure), which also means being open to global trade. The "wealth of nations" (Adam Smith) is fostered by competition between nations (David Ricardo). We need more globalization, not less.

In order to break through the (fake) narratives typically used by populists, economic and financial education must also be strengthened. These are important prerequisites for participation and (political) maturity. Those who do not understand their finances can hardly be expected to invest wisely in order to build wealth and strengthen their independence. Those who are unable to think critically about basic economic issues will fall prey to (economic) political populism. This makes economic education relevant for our democracy. How can someone make a political judgment if they do not understand its economic consequences? They will fall prey to populist narratives. Economic education helps build wealth, reduce inequality, and strengthen our democracy.

Consequently, strengthening wealth creation is part of preventing populism. Prosperity must also mean "prosperity for all." "If substantial subgroups of society feel that they cannot expect any benefits from the existing social order, [ ...] then the existing democratic institutions [...] lose their legitimacy," states economist Tim Krieger. While property is a fundamental part of a market economy, the path to getting there, wealth creation, also needs to be encouraged. Private property counteracts the feeling of losing independence. This puts wealth creation policy on the agenda. As an immediate measure, it could also make sense to switch at least part of the statutory pension system to private capital accumulation. Those who build up wealth (for old age) themselves are less dependent on political processes that determine the level of pensions. 

We need to break the "us against them" mentality. It's not just about strengthening our democracy, but also our prosperity. The two go hand in hand.