Are democracy and capitalism compatible? Or, to put it differently: What made democracy and capitalism compatible for decades, even centuries, and what strains this relationship today? The end of the Cold War seemed to settle longstanding debates about the political and economic institutions best able to achieve freedom and security. But a few decades have passed, and our institutions now seem brittle. Longstanding critiques of capitalism are being dusted off and repackaged.

The problems with democracy and capitalism are diffuse and complicated. We’re faced right now with (at least) three obvious problems: a President who violates democratic norms, citizens who feel that representative institutions are broken, and hostile and polarized parties. There is also the deeper question of whether we can even fix our democratic institutions, which seem unable to govern effectively in our era of twenty-first century capitalism.

The past half century has witnessed a quiet upending of the balance of power between the private and public sectors. Decades of deregulation, combined with an ideological project on the political right to delegitimize state activity and embrace the market, have left a void where governance usually occurs. As faith in representative institutions declines, corporations are stepping up their policy involvement: Levi’s recently announced that it is joining Michael Bloomberg’s gun control initiative; Amazon, Berkshire Hathaway, and JP Morgan launched a venture to tackle America’s poorly performing health-care system. While businesses have long been active in politics through lobbying and advocacy, these new initiatives aim to solve the public policy problems that our elected officials cannot or will not.

But in a democracy, the primary social contract is, and should be, the one between citizens and their elected officials, not between consumers and corporations. We tend to think of the relationship between business and government as adversarial, and to see the history of social progress as a series of democratic triumphs over capitalist greed. However, there is an emerging recognition among scholars that reading history “backward”—that is, by projecting contemporary business-state relations on to the past—obscures the productive ways that capitalism and democracy have, until our time, coevolved.

In the nineteenth century, the corporation came to assume its privileged status in American life. Since then, there have been three distinct periods in the relationship of capitalism and democracy. The managerial capitalist era began in the late nineteenth century, as new ideas about management and organization led family firms to develop into large corporations. Democratic institutions, however, were still governed by the spoils system that Andrew Jackson implemented after his victory in 1828. Political parties relied on patronage, not policy, to mobilize voters and staff the federal bureaucracy. An emerging class of commercial merchants and manufacturers grew concerned with problems of ineffective governance. They embraced politics, pushing parties to create workable regulatory structures and dismantle patronage.

After the tumultuous decades of the Great Depression, the New Deal, and the two world wars, when business was sometimes an adversary of democracy and other times an ally, a new era of stakeholder capitalism emerged in the 1950s. Executives of large American corporations spoke about enlightened self-interest, and promoted growth through policies that expanded infrastructure, taxes, education, housing, and cooperation with labor. After all, capitalism requires outputs from government that include stable governance, effective bureaucracies, rule of law, and public accountability. During the managerial and stakeholder eras, businesses worked with government to serve both societal demands and capitalist needs.

Yet capitalism and democracy entered a new phase after the economic and political crises of the 1970s—the phase of “shareholder capitalism,” one that is also marked by deregulation, globalization, and financialization. This new era has entailed a new conception of the corporation—one that, as Milton Friedman explained, has no moral obligation except to increase profits for shareholders. By this logic, outcomes that are good for capitalists need not be good for the public, and problems of stagnant wages and productivity, economic inequality, and labor risk and precarity need not concern capitalists.

In a democracy, the primary social contract should be between citizens and elected of cials, not between consumers and corporations.

President Trump personifies many of the problems of this new era. He is an executive with global business interests who profits from his political position; his Cabinet is composed of wealthy capitalists with little history of public service, passing policies from which they materially benefit. But his rhetoric and assault on norms has also led to public outcry from businesses, leading to the eventual dissolution of Trump’s Strategy & Policy Forum and his Manufacturing Council. Corporations that take controversial political stances know they enter potential minefields, but also reflect a recognition that corporations cannot ignore issues important to the public.

There are two potential paths out of the crisis of democracy and capitalism. One is a relationship that looks like plutocracy, a political system that fuses the interests of capitalists and democrats and leaves citizens, workers, and consumers with little political power. The alternative is capitalist reengagement with the government, and recognition that the democratic process should drive social and economic outcomes. A strong democratic state solves collective action problems that capitalists governing themselves cannot—those of oversight and regulation, for example—and creates a foundation for long-term sustainable growth.

Capitalists need to embrace politics, not because it is easy or self-serving, but because the Schumpeterian competitive struggle at the heart of democracy addresses problems in ways that are transparent, legitimate, and accountable. It is in the political arena, not the private sector, where fundamental debates over states and markets are fought and resolved, where citizens’ groups and businesses alike battle over wages, benefits, redistribution, consumer welfare, workplace safety, and corporate power. The relatively short history of capitalism and democracy shows us that corporations can play a role in improving democracy and governance. Doing so may be the only way out of today’s crisis.

Phase One, Managerial Capitalism: Professionalism and the End of Patronage

In his inaugural address in 1888, President Grover Cleveland warned that “Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters.” While industry constituted a fraction of the American economy in 1870, within a generation, “big business” loomed large in the everyday lives of most Americans.

A technological revolution was also fueling innovations in manufacturing. The railways soon connected once distant areas, and factories drew workers to cities. Family firms grew into modern corporations, expanding through a frenzy of mergers and acquisitions, and through processes of vertical and horizontal integration that transformed industrial production. Conglomerates and trusts, such as Carnegie Steel and Standard Oil, were led by industrialists with reputations for both brilliant acumen and unsavory business practices.

The corporation evolved over time, as documented in Alfred Chandler’s Pulitzer Prize-winning book, spurred by the innovation of managerial capitalism. Firms grew in both scale and scope. They separated ownership from management, implemented managerial hierarchies and standards for promotion, and established trade associations to share business practices across what was fast becoming a national economy. The National Board of Trade formed in 1868, bringing together leaders of industries, with lawyers and politicians, to discuss the proper role of government, given the exigencies of the new industrial economy.

One of the foremost collective problems that businesses faced was a federal bureaucracy wholly unequipped to regulate or even to legislate on business matters; it consisted primarily of a postal service and customshouses. The parties relied on patronage to win votes and to staff the civil service, and the federal government had little formal regulatory apparatus. Congressional investigations into bureaucratic corruption revealed, for example, that the staff of the New York City customshouses were often disqualified, drunk, or absent, such that there were some $36,000,000 in revenues lost each year.

This new class of capitalists was hostile both to patronage and to the ineffectiveness of the federal government. They saw patronage as averse to the principles of business itself, which included transparency and efficiency. Hamilton Hill, a Boston merchant and the Secretary of the National Board of Trade, argued in 1885 that government administration needed to be “separated utterly from party politics.” Leaders of industries ranging from shipbuilding to coal-mining also called for national regulations to protect against price discrimination from the railways; they argued in favor of regulation as a way to establish a level playing field for businesses. Merchants, farmers, and railway owners testified in favor of the Interstate Commerce Act of 1887, which created the Interstate Commerce Commission (ICC), the federal government’s first independent regulatory agency. The ICC was given the power to review discriminatory railway rates and anti-competitive practices, and it was strengthened through subsequent legislation during the Progressive period. The Interstate Commerce Act created a template for regulation through agencies, later providing the model for the Federal Trade Commission and the Federal Communications Commission.

Businessmen of the day also began seeking out long-term relationships with parties, providing campaign donations, legislative proposals, and expert testimony before congressional committees. The Republican operative Mark Hanna, an Ohio businessman himself, created businessmen’s leagues to mobilize business leaders for presidential campaigns. Hanna’s ability to corral corporate donations secured William McKinley’s victory in 1896 against populist Democratic candidate William Jennings Bryan.

The political mobilization of business produced a change in democratic politics. Capitalists realized that democratic institutions provided an underlying architecture for effective markets that capitalists, working alone, could not. Rather than working against the state, an emerging class of merchants and manufacturers in the late nineteenth century saw government as the guarantor of economic stability and growth. In developing relationships with parties and politicians, the business community created a template for pluralist party politics that was concerned with mediating competing interests and developing policies, rather than relying on patronage alone.

This relationship of managerial capitalists to democratic institutions continued well into the 1900s, laying the groundwork for the American Century. While some corporate leaders objected strenuously to elements of the New Deal, others organized through vehicles such as the National Civic Federation and its activities at that time to promote policies beneficial for growth (such as infrastructure and public goods) and to stress cooperation with labor. Wartime mobilization was a boon for business, creating millions of civilian jobs. Productivity rose, and corporations profited; President Roosevelt worked closely with business leaders to drive the war effort. By the end of World War II, corporate managers embraced a pragmatic and socially oriented politics. As the historian Jennifer Delton has noted, the editor of Fortune, Russell Davenport, wrote in 1951 that managers “have a responsibility to society as a whole,” while Frank Abrams, chairman of Standard Oil, argued that managers needed to “maintain an equitable and working balance among the claims of the various directly interested groups—stockholders, employees, customers, and the public at large.”

Phase Two, Stakeholder Capitalism: Capitalists for the Common Good

The idea that managers answered to stakeholders was highly influential, and the stakeholder era involved a high-profile business elite advocating strong government and policies that benefitted American workers. The period after World War II gave rise to unprecedented economic growth, large export-oriented American corporations, low levels of economic inequality, a boom in higher education, and a politics governed by two parties who saw bipartisan compromise as a goal, rather than enemy, of democracy. When the CEO of General Motors, Charles Wilson, was nominated to be Dwight Eisenhower’s secretary of defense, he famously said that “What’s good for our country was good for General Motors, and vice versa.” A few years prior, Walter Reuther, the head of the United Auto Workers, secured contracts with General Motors and other automobile companies guaranteeing health care, pensions, and higher wages. In 1952, John Kenneth Galbraith’s American Capitalism argued that capitalism in the United States succeeded because of countervailing power across corporations, government, and labor.

An important vehicle for business interests was the Committee for Economic Development (CED), a group of executives from large corporations who advocated universal health care, tax increases, infrastructure, education, and full employment. Mark Mizruchi’s history of the CED shows that the business elite were concerned with problems of class division, poverty, and racial discrimination, and they saw government policy—not the private sector—as the primary means of redress.

Paul Hoffman, one of the CED’s founders and an automobile executive, promulgated a vision of corporate statesmanship governed by enlightened self-interest. His was not a vision in which business leaders advanced specific liberal or conservative goals. Instead, the CED advocated policies they thought would benefit the country and its corporations alike—unemployment compensation, spending on public works, and promotion of research and education. They advocated these policies across Republican and Democratic administrations, emphasizing that they benefited both businesses and the country. In 1946, Hoffman wrote that “[T]he interests of the individual can be advanced only through a wide range of collective actions, both governmental and private.” In addition to its work on domestic policy, the CED also lobbied for the creation of the Council of Economic Advisors, the International Monetary Fund, and the Marshall Plan, which Paul Hoffman administered.

The stature and influence of the Committee for Economic Development stood in contrast to the National Association of Manufacturers (NAM), a more traditionally right-wing national trade association that traced its roots to the nineteenth century. While CED was working to advance tax increases and health care, NAM was mired in ideological battles over a far-right faction within its leadership. A few leaders in NAM, including Cola Parker, the chairman of Kimberley Clark, and Fred Koch, the industrialist and father of Charles and David, eventually founded the John Birch Society in 1958. They denounced Eisenhower and the United Nations as communist. Yet they were marginalized both by business leaders and by establishment conservatives. As efforts to pass Medicare ramped up, NAM publicly opposed them. Peter Swenson shows that in the decade from 1957 to 1966, membership in NAM dropped from 21,000 businesses to only 14,000. President Johnson devoted his time to cultivating personal contacts with members of the Business Council and Committee on Economic Development, rather than with NAM.

Today, capitalists’ power dwarfs average citizens’. Financial institutions alone control access to housing, education, and retirement.

The postwar growth of the American economy was a result of ongoing consultation with a business community that supported the work of government. In 1966, 22 chief executives, including the CEOs of Ford, General Electric, and Chase Manhattan Bank, signed a letter of support for Johnson’s “demonstration cities” bill providing grants for urban renewal, transit, and housing. In the 1970s, the CED included executives from AT&T, Caterpillar, DuPont, Exxon, General Motors, and IBM, and actively supported an employer mandate for health insurance. The CED also issued a statement in 1971 on the “Social Responsibilities of Business Corporations,” calling for the elimination of poverty, equal opportunity regardless of race or sex, and livable communities with good housing and transit. It argued that “[C]orporate self-interest is inexorably involved in the well-being of the society of which business is an integral part.”

There is a vibrant, ongoing debate today about how to conceive of capitalist power in democracies. The conventional wisdom has long been that there is an inherently adversarial relationship between business and government, one of constant conflict, with clear winners and losers. The Gilded Age trusts got busted. The Great Depression produced the New Deal.

This framing is apt today, when business serves as a bogeyman, and when the sovereign power of citizens pales in comparison to the power of global capitalists like the technology platforms, with their trove of information about our interests and whereabouts, and the financial institutions, which control and mediate our access to housing, education, and retirement. Even Fred Koch seems to have come out ahead in the long run: His sons’ civic group, Americans for Prosperity, is a veritable party in itself, with an estimated $150 million of Koch Industries political money, 500 paid staffers, and nearly 3 million “citizen activists” mobilized to become politically active on behalf of candidates and policy goals.

But projecting our current adversarial relationship onto the past obscures the complex and heterogeneous interests that business has had at other times in our history, and the significant role business once played in shaping democracy in a positive way. Revisionist scholarship on business preferences has been particularly vociferous about the absence of unified business opposition in many epochs of social reform. Historians of capitalism denounce the analytical simplicity of decrying all business involvement in politics as malevolent. Louis Hyman, in “Why Write the History of Capitalism?” argues that capitalists, frequently painted in broad strokes, require greater attention: Their decisions “matter more than perhaps anyone in determining our everyday lives, especially those on the bottom.” The burgeoning field of the history of capitalism, which has grown since the mid-2000s, is noteworthy because it entails a shift from thinking of capital in static, fixed terms. For these historians, a generation of scholars coming up after the New Left and faced with the urgent realities of capitalism’s totalizing grip on all aspects of post-1980s America, capitalism has moved from being considered “inevitable, mechanical, efficient, and boring” to a dynamic, contingent set of actors, institutions, and processes. The profit motivation may always be present, but the ways profits are achieved vary widely.

Phase Three, Shareholder Capitalism: The Concentration of Corporate Power

To whom does capital answer today, and what incentives do capitalists have to engage with democratic institutions? As discussed, the managerial capitalism rooted in the nineteenth century evolved into the stakeholder capitalism of the postwar period, and a business elite guided both by profit and by political awareness of—and sometimes, promotion of—the public good. Corporate governance entailed powerful managers and relatively quiescent corporate boards, and finance was heavily regulated. Democratic governments used instruments of Keynesianism, fiscal policy, and social welfare to spur economic growth and create equitable opportunities.

But in the 1970s, as the political landscape evolved, so too did the role and attitudes of business. Staggering inflation and the economic downturns of the 1970s produced skepticism about Keynesianism, and global competition put pressure on American corporations, particularly those in manufacturing and industry. Watergate tarnished faith in government. Finally, the creation of the Environmental Protection Agency and the Occupational Safety and Health Administration generated a backlash from business.

The components of neoliberalism, including market fundamentalism (a commitment to laissez-faire principles) and an emphasis on shareholder value, furthered a distaste for democratic intervention in markets. Corporate motivations and activities became increasingly focused on maximizing short-term profits as a result of both ideological changes and external pressures. Hostile takeovers—particularly using the leveraged buyout, a financial innovation of the 1980s—allowed corporations to be bought and sold as assets in and of themselves. The proliferation of financial instruments and asset classes changed the goals of corporations, and the decisions of managers became increasingly subordinate to the decisions of finance executives. These trends have led to excessive cost-cutting, wage reductions, and benefit cuts. Corporations rely increasingly on outsourcing and contracting, which further severs ties and obligations to employees. The financial sector has grown dramatically—by 2001, financial sector profits represented more than 40 percent of the United States’s total profits—but unsurprisingly, its gains have been uneven. Until very recently, wages have stagnated or declined for low- and middle-class workers, while executive compensation has risen dramatically.

The unfettered capitalism we’ve witnessed since the 1980s has not produced outcomes good for either democracy or for long-run economic productivity. A highly disciplined business lobby now exerts its political capital to extract policy concessions from the state. It is skilled at playing gatekeeper for issues on the policy agenda, obtaining favorable rules changes in executive agencies, and winning legislative battles, particularly in state legislatures. Business is left to solve its own problems and pursue its own interests, rather than using the political arena to adjudicate conflict and disagreement between corporations and the public. Finance capitalism makes it difficult for social policy alone to bridge widening wealth and income gaps, because profits from finance accrue at the expense of consumer and worker indebtedness.

Shareholder capitalism has produced cynicism and dissatisfaction with corporations, but has not led citizens or politicians to mobilize around a clear set of policies. The right rails against “crony capitalism,” the left against “Wall Street,” and at the end of the day, there is no general agreement about what elements of shareholder capitalism are problematic, or how policy might actually address them. After all, the wholesale adoption of neoliberal economic policies happened with the support of Republican and Democratic administrations alike.

Phase Four: Plutocracy or Reengagement?

A decade after the financial crisis, the future of democratic capitalism is uncertain. The fusion of economic and political preferences in the United States has been extensively documented in this new Gilded Age; the affluent are more likely to participate in politics, and our economic policies protect their wealth and assets. The conservative Supreme Court is likely to continue to rule in favor of corporate power in any number of ways, such as eroding the administrative state, unraveling worker protections, and allowing unlimited corporate money in politics.

The scope of the problem is also transnational. Corporations are now multinational conglomerates that employ workers and produce goods in countries around the world. They do not just answer to one government. The Panama Papers and Paradise Papers, leaked electronic documents, showed how the global elite—heads of state, investment banks, and global corporations—hide their earnings through tax havens, offshoring, and shell companies. Foreign oligarchs also park their wealth in the financial and real estate havens of advanced democracies. During the Ukraine crisis of 2014, for example, a British deputy national security advisor was photographed entering Downing Street with a memo advising against Russian sanctions in order to protect the financial interests of the City of London.

But the problems of acute polarization and gridlock, and of rising populism rooted in economic and political grievances, are impossible to ignore. There are signs that corporate leaders are wary of an excessive focus on profit above other considerations. Jamie Dimon and Warren Buffett took to the pages of The Wall Street Journal to call for an end to quarterly-earnings reports and received a favorable tweet from the President. Larry Fink, the CEO of BlackRock, has been vocal about the responsibilities of corporations. He has called on companies to step in where government fails to deliver, and in a letter to CEOs last year, encouraged companies to develop long-term strategies, diversify their boards, plan for climate change, and review compensation.

However, these solutions do not roll back market fundamentalism so much as entrench it. Karl Polanyi argued that states and markets are mutually constituted, but reliance on the market has hollowed out the state, and citizens increasingly look for private solutions to public problems. In response, corporations use vehicles such as corporate social responsibility (CSR), inclusive capitalism, or philanthropies to signal their commitment to various social goals.

Corporate social responsibility refers to an amorphous commitment to society. In 1972, Dow Votaw, a professor of business administration at the University of California, Berkeley, argued that “corporate social responsibility” was conceptually vague: A corporation can act responsibly with regard to its workers or to its environmental impact, or it can be socially conscious, or it can donate to charity. All are considered examples of CSR. The concept is amorphous precisely because the corporation does not have a clear set of actors to whom it is responsible in doing such things (outside of shareholders). A coalition of businesses and progressive think tanks also advocate “inclusive capitalism,” which is a combination of corporate practices and economic policies that aim to create long-run value and growth. Finally, corporate executives use vehicles such as philanthropies and foundations to advance social goals. Many executives have signed a Billionaires’ Pledge to give away their wealth during their lifetimes. But this use of private money, while perhaps altruistic, is also unaccountable and undemocratic.

The solution to this crisis of democracy must lie, as it has in the past, with politics. It is naïve to ask capitalism to change itself from within.

How do private solutions improve the overarching relationship between democracy and capitalism? While they might help to improve social outcomes on the margins, the likelier outcome is that they whitewash the sins of corporations and leave in place the structural conditions that precipitate democratic decline. Capitalism is a logic of production, not of political values. It is both naïve and historically inaccurate to ask capitalists to change capitalism from within. The solution to this crisis of democracy must lie, as it has in the past, with politics, whether in the form of new economic policies or empowered and autonomous political institutions.

A move away from shareholder capitalism requires businesses not only to acknowledge that the status quo is unsustainable, but also that democracy provides the tools necessary to change the future. It allows us to listen to and craft policies in accordance with what citizens need, and to recognize that the government is the central actor in shaping societal outcomes. Excising the role democratic institutions play in regulating capitalism does not serve the long-run interests of corporate America.

As the United States industrialized in the nineteenth century, many corporations engaged in corrupt politics, excessive rent-seeking, and labor repression, and parties built on patronage did little to stop them. But changes to capitalism produced changes in politics, or at least in business’ role in politics. Managerial capitalism produced a class of business leaders who demanded better governance, and parties responded by dismantling patronage and building new administrative institutions. The United States became a global economic and political leader in the stakeholder era with the aid of its business elite, many of whom pushed for social protections, education, infrastructure, and regulation. Democratic capitalism succeeded because capitalists were on board with—and at times, worked to improve—our democracy. This stands in stark contrast to capitalists today, who seem at best agnostic, and at worst, outright cynical, about our system of government. Perhaps the people will do the hard work needed to reconfigure this relationship, through mass protest or through the election of new leaders. But the scarier outcome is that our democracy capitulates, while capitalism perseveres.