Capitalism and democracy follow different logic: unequally distributed property rights on the one hand, equal civic and political rights on the other. Capitalism is not democratic; democracy is not capitalist.
Throughout the past two centuries, democracy and capitalism have proven themselves the most successful systems of economic and political order. Following the transformations of China’s economy and the demise of Soviet-style socialism after 1989, capitalism has become the predominant system worldwide. Only a few isolated countries, like North Korea, have been able to resist capitalism’s success through brutal force. The market has become the primary mechanism for economic coordination and the maximization of profits. The global competition of financial systems has been won. Yet capitalism, as they say, used in singular form, conceals the differences in the “varieties of capitalism.” China’s state capitalism, the Scandinavian welfare state economies, and the Anglo-Saxon neoliberal strand of capitalism differ substantially. They function or malfunction somewhat differently in coexistence with democratic regimes.
The success of democracy in the later quarter of the twentieth century was notable. However, democracy’s success pales compared to the spread of capitalism worldwide. If one takes the minimal standards of democracy as a measurement, 123 countries (out of around 200) could be called an “electoral democracy.” According to studies, if the much more stringent concept of liberal democracy is applied, only 60 countries can be classified as a liberal rule of law-based democracies. Yet, both electoral and liberal democracies coexist with capitalist economies. Historical evidence also substantiates that no developed democracy could exist without capitalism. Vice versa, this is not the case. The People’s Republic of China, National Socialist Germany, Singapore, and the capitalist dictatorships of Latin America or Asia in the twentieth century can flourish in different forms of political government or even exemplify that capitalism can coexist, such as democracy and dictatorship.
During the first postwar decades, tensions between capitalism and democracy were moderated through the socio-political embedding of capitalism by the welfare state and an interventionist tax. Yet, capitalism financialization has broken the precarious capitalist-democratic compromise since the 1980s. Globalized and deregulated markets have seriously inhibited the ability of democratic governments to govern. If these challenges are not met with economic and democratic reforms, democracy may slowly become an oligarchy legitimized formally by general elections. Hence, it is the neoliberal triumph that challenges democracy and not the crisis of capitalism.
Compatibilities and Incompatibilities
The basic logic of capitalism and democracy are fundamentally different and lead to considerable tension between the two. Both have various claims to legitimacy: unequally distributed property rights on the one side and equal civic rights on the other. Capitalist activities aim to facilitate the selfish-seeking behavior of particularistic advantages. The aim of democratic politics is the realization of the common good. With capitalism, decisions and implementation lead to economic and social inequality (income, wealth, power, and life chances). This is hardly acceptable in a democracy built on principles based on equal rights, opportunities, and duties. Vice versa, the complete application of democratic decision-making—general and equal participation as well as majority decisions and minority protection—is inconceivable according to the rules of capitalism. Thus, capitalism is not democratic, and democracy is not capitalist.
On the other hand, it is a fundamental rule of liberal democracy that the reach of political decisions has to be limited. Securing fundamental rights (among them the right to private property) through constitutions and the rule of law, and not least through recognizing the principle that democratic decision-making is a critical element of the political system. As stated in the African Association book on modern economic development by Samuel Enajite Enajero, Ph.D., societies are composed of institutions. There are institutions, wherever there are rules. In the era of free market democratic capitalism, some vital institutions that make communities prosperous are taken for granted or ignored. This is not surprising, knowing there has been institutional evolution over time and solid contemporary institutions result from historical institutions. His book illustrates historical collective social institutions that are catalysts for modern-day’s economic successes, and the lack of such historical institutions contributes to economic failures in some nations, especially nations of sub-Saharan Africa.
Moreover, it is also important to highlight certain affinities and congruencies between capitalism and democracy. Competition and electoral decisions play vital roles in both contexts. In theory, capitalism and democracy share common enemies. These are the uncontrollable agglomeration of state or economic power, disorder, corruption, and unpredictability. However, there is a decisive difference: whereas certain forms of capitalism function and produce an extreme concentration of capital and wealth, democracies cannot coexist with equal attention and constellation of power. Finally, democracy and capitalism can support each other. Capitalism struggles without a generally predictable state order. Such will most likely be achieved in the long run through democratic means. It is similarly true that socially embedded capitalism is most likely to achieve sustainable growth, legitimizing and strengthening democratic institutions.
Final Words
Since the late 1970s, protest movements have focused more on cultural than economic issues. These new movements were crucial. However, as social and political protests no longer paid much attention to socioeconomic inequalities, these problems grew in the shadows. The disembedding of capitalism is challenging democracy’s crucial principle of political equality.
Thus, the cultural turn of progressive democratic politics has forgotten the problem of economic redistribution. And so it now stands empty-handed, without a cure for democracy’s most obvious disease, inequality. Is capitalism compatible with democracy or vice versa? It depends. It depends on the kind of democracy and the type of capitalism. If these challenges are not met with economic and democratic reforms, democracy may slowly become an oligarchy formally legitimized by by-elections.
Free-Market Capitalism and Democracy: Two Sides of the Same Coin
By Samuel Enajero, Ph.D
African Association for Evolutionary Economics (www.aafee.org)
In free-market capitalism, entrepreneurs invest their savings or borrow, undertake risks to pursue their passion. They make enormous contributions to society as they produce, employ, and equip people with soft and technical skills. In return, capitalists are rewarded with profits and wealth. In addition to providing livelihood to citizens, capitalists sponsor the government and provide public goods and services by paying taxes. Either by government regulations or community relations, capitalism creates glittering and dazzling environments. The capitalists cannot take all the credit. If there are not enough customers that work hard to purchase the capitalists’ products, they cannot breakeven and make a profit. The larger the number of people that demand a capitalist’s products, the wealthier the capitalist becomes. Knowing that people vote for a product through their dollar power, is capitalism democratic?
The elements that differentiate nations’ socio-economics are the size of social content in producing and distributing goods and services and the degree of centralized or decentralized arrangements. In many political decision-making processes, some people are left worse off. The barometer for a preferable political order is how many people suffer adverse effects from the outcome of a decision. Therefore, the rules––ranging from unanimity rule to one person’s rule in making decisions––distinguish the many strands of democracies. ¬¬Auspiciously, these forms of democracies are buttressed by the desire for collective progress. As long as collective action is the driving force of democracy, the optimal majority is inherently preferred to one person’s rule (autocratic government); and the latter would be preferred to any person’s rule––no rule (Enajero, 2018).
Akin to the Blog Contributor’s statement, it is not surprising that capitalism is thriving in different forms of democracy. The free will to follow one’s passion, produce, satisfy peoples’ wants, and make profits under capitalism is similar to the practice in the political marketplace (democracy), where a candidate wins an election due to his/her platform that satisfies the preferences of the optimal majority. A capitalist survives due to his/her popular product. Participants in the political marketplace win elections due to their popular agendas. Nations that practice real capitalism and democracy progress because both systems appease popular desires. Therefore, both capitalism and democracy are functions of popularity.
From economics perspective, humans survive by two types of goods—private goods and public goods––regardless of the local institutions. Owners of capital could provide private goods and services efficiently in a competitive market via the price mechanisms, and make the normal profits reflected on the stock prices indexed by Wall Street. Due to the nature of some goods, services and issues, owners of capitals cannot provide public goods or efficiently resolve social issues that collectively affect citizens. A slew of issues (public goods and services) fall into this category. Thus, a political marketplace is needed. On one side of the coin, capitalism plays an important social role in the economical supply of private goods. On the other side, democracy, a political market, is the most efficient method to deliberate, provide public goods, and resolve social issues where free-market capitalism fails.
Autocratic and oligarchic government systems can harbor capitalists, provide public goods and resolve social issues in a timely manner, but they do so with a mountain of adverse effects, including the annihilations of opposition. A large portion of the population may have no say; therefore, they are inefficient. Although, the government provides public goods, the capitalist is relied upon to produce various public goods. Note the difference between ‘provide’ and ‘produce’ in the previous statement. Democracy founded on optimal majority minimizes the time cost plus the adverse effects in collective decision-making.
The key argument put forward by the Blog Contributor is that an unequal right exists under capitalism but equal rights under democracy; thus, both systems are incompatible. In free-market capitalism, people are rewarded based on their efforts and abilities. The capitalists become wealthier as they ‘reap the fruits’ of their contributions––creating jobs and products that improve social welfare.
Although in the political marketplace, there is one ‘man’ and one vote, it would be incorrect to believe that people have ‘equal rights in a democracy.’ In practice, political entrepreneurs, analogous to free-market capitalists that invest in politics, may have greater political rights and privileges. Critics of the public interest theory of government argue that the public interests are overshadowed by the special interest groups of the capitalists who sponsor candidates, including the law makers. Thus, the capitalists in democracy may pursue special interests other than the public interest. Some practical examples in the U.S. are the NRA and minimum wage issues. Here, the beneficiaries are the capitalists in the practice of democracy. What about the captive theory of governments, where retired or former government regulators become the employees and lobbyists for the capitalists? These former employees may circumvent government regulations designed to curtail the excesses of the capitalists. Apparently, there is democracy in capitalism and capitalists in democracy. Perfect information is essential for everyone, yet the capitalists have better information than the ordinary voters. Thus, just as risk-takers are more rewarded under capitalism, political stakeholders may receive the larger piece of the democratic cake.
Regardless of the kind of democracy, capitalism flourishes as long as inclusiveness is present in the social fabric. A collective spirit is needed to sustain both capitalism and democracy. The capitalists abhor uncertainties and risks; liberal democracies allow the capitalists to penetrate democracies directly or conveniently by proxy. In the nascent democracies of sub-Saharan Africa, however, such collaborative social structures are yet to exist in their institutions. This makes capitalism and democracy a struggle in the region. The government-led capitalism in China, at the start, garnered capital from the cities and rural areas with its collaborative approach.
Sub-Saharan African nations have financial capital, but lack an inclusive and domestic economic collaboration that could induce active capitalism. There is an element of democracy in capitalism, but repeated elections do not justify viable democracy. Sub-Saharan African economic structures are undemocratic and non-inclusive. There must be encompassing social institutions, without which governments formed by mere elections become a farce. Can emerging democracies in Africa replicate public choice governments that could restore confidence in foreign entrepreneurs and investors, or initiate a government-led capitalism? That’s the question African leaders must answer fast as the rest of the world is moving on.
References
Enajero, S. (2018). “Interdependence Costs, Collectivism, and the Economic Rationale for Democracy.” Journal of Public Administration and Development Alternatives.” Vol. 3, No.1, pp. 1-11.