The US democratic-capitalist model is on trial. No schadenfreude, please

This week the demands of American democracy clashed with those of American capitalism. And China's premier smiled

As Meltdown Monday (September 29) follows Meltdown Monday (September 15), the mountain of American capitalism is changing shape before our eyes. Like Krakatoa, nobody knows how it will look when the eruptions are over.

"Democratic capitalism is the best system ever devised," George Bush informed his fellow Americans in a solemn televised address last week, striving to win Congressional support for a $700bn bail-out package to save "our entire economy". But this Monday, as the House of Representatives voted down the package, causing the Dow Jones index to lose $1.2 trillion of value in a single day, democracy collided with capitalism. To be precise: the urgent demands of the contemporary American version of democracy clashed with those of the contemporary American version of capitalism.

Crucially, it was House Republicans who defied their president's appeal. For some, the choice was ideological. They would rather die than vote for an expansion of government's economic role which they regard as tantamount to socialism. No, Bolshevism. Listen to Representative Thaddeus McCotter of Michigan, chair of the House Republican policy committee and co-sponsor earlier this year of a resolution urging the president to make 2008 "The National Year of the Bible", as documented in the Congressional record of Monday's debate: "The choice is stark, and it was put forward in the book by Dostoevsky. In The Brothers Karamazov, the grand inquisitor came to Jesus and he said: 'If you wish to subject the people, give them miracle, mystery and authority; but above all, give them bread.'

"It has always been the temptation in a crisis especially to sacrifice liberty for short-term promises of prosperity, and it was no mistake that during the 1917 Bolshevik revolution the slogan was Peace, Land and Bread. Today you are being asked to choose between bread and freedom. I suggest that the people on Main Street have said that they prefer their freedom, and I am with them."

Main Street Jesus against the Dostoevskyan Bolshevik bail-out. Who was it said American reality trumps its own fiction? The fact that the vote came in the midst of a presidential election didn't help. Both sides pretended not to be playing party politics while playing party politics.

Mainly, though, those Congressmen and Congresswomen who voted against - Democrats as well as Republicans - were afraid of losing their own seats. All are up for re-election on November 4, the same time as the presidential ballot. Most had faced a tidal wave of emails and phone calls expressing public anger at letting those responsible in Wall Street and Washington off the hook. So they felt they had to demonstrate to those furious voters that they, too, were mad at Wall Street and the friends of Wall Street in Washington. (That is, in the case of many House Republicans, themselves until only recently.) Humbug, you may say. Lowdown politics rather than high-minded statesmanship, you may sigh. You may be right. But don't tell me this is not democracy, a system in which the people choose their representatives.

Why did so many ordinary Americans react this way? Most Europeans' first reaction would be: state, ride to the rescue! But this is America, where the geysers of anti-Washington and anti-Wall Street populism have deep historical springs. And this is early 21st-century America, where the rich have got richer while the poor have got poorer, and the middle class - whose plight Barack Obama is evoking very effectively - have struggled to make ends meet. The rich who have got richer include the architect of the original bail-out plan, treasury secretary Henry "Hank" Paulson, former chief executive of Goldman Sachs, whose stake in that firm was said to be worth about $500m when he cashed out in 2006.

I write on Wednesday, while the House of Representatives is in recess for Rosh Hashanah. By the time you read this, the House may have repented, and be preparing to pass a revised version of the bill agreed in the Senate. It may be that this restores sufficient confidence for banks to start lending again, and another Great Depression will be averted. Or maybe not; we shall see.

Even if it does, the question about democratic capitalism remains. A quarter-century ago, near the beginning of what came to be known as the Reagan revolution, the American Catholic social theorist Michael Novak published an influential book, The Spirit of Democratic Capitalism. It argued that capitalism is "compatible only with democracy". "While bastard forms of capitalism do seem able for a time to endure without democracy," wrote Novak, "the natural logic of capitalism leads to democracy." And true capitalism requires moral virtues such as "temperance and prudence, fortitude and justice".

In 2008, China's undemocratic capitalism looks like one hell of a bastard. What's more, its leaders claim that it embodies some of those very virtues that Novak specifies for democratic capitalism - and which the American model seems spectacularly to have lacked in recent times. Temperance! Prudence! Justice! In a remarkable recent interview with Fareed Zakaria, which you can see on CNN online, China's premier Wen Jiabao argues that China combines a market economy with macroeconomic guidance by government.

Amazingly, he illustrates his argument by reference to the two main works of Adam Smith. The Wealth of Nations, said Wen, highlights the need for the invisible hand of the market, while The Theory of Moral Sentiments shows the need for the visible hand of government, in the interests of social equity and harmonious development.

In reality, of course, China has massive inequality and corruption, and the claim that its model of capitalism without democracy - the real thing, I mean, not just the label - is a better, more durable and more moral alternative may turn out to be baloney. Although Wen makes his case more articulately than President Bush, I think Bush is still more likely to be right. To adapt Churchill, democratic capitalism is the worst possible system, apart from all the others that have been tried from time to time.

But democratic capitalism is now on trial. It faces huge homemade problems and formidable competition. Fortunately, there are many variants of democratic capitalism, not just the one that is erupting in the US. For some Europeans, it will be tempting to say: "Ah, if only you Americans had adopted our nice, humane, equitable version of social democratic capitalism!" Indeed, when the dust cloud has cleared and the lava has stopped flowing, the role of the state in the US economy may look more like that in some European countries. But against any easy claim of superiority, we have to remind ourselves that most European economies are struggling to generate jobs, innovation and entrepreneurship as the American economy has succeeded in doing for much of this quarter-century. Anyway, there's not just one European model but many - and other variants elsewhere. That's a strength, the strength of pluralism.

The challenge to American democracy today is nothing less than to prove it can reform its whole model of democratic capitalism, and make it better.

Pray that it can.

timothygartonash.com