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.
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.