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Description
While there have been many historical instances of capitalism without liberal, representative democracy, there are no known cases of liberal, representative democracy without capitalism. But with few exceptions, academic analysts have tended to focus either on the threat capitalism poses to democratic institutions, or on the support democratic politics offer to capitalist legitimacy.
Academic discussion of the tensions between democracy and capitalism tends to treat capitalism as a hindrance, or even danger, to democracy. Capitalism is based upon inequality of reward, while democracy is based upon some notion of equality. The inequality of wealth, and the ability of the wealthy to influence the holders of political power, is said to undermine the equality of representation inherent in the democratic ideal.
There are also powerful arguments for the compatibility of democracy and capitalism. Democracy smooths away the rougher edges of capitalism in a manner that ultimately contributes to capitalism's legitimacy. Transfer payments from the wealthy to the less wealthy; insurance against illness, unemployment, and old age; and other policies associated with the democratic welfare state soften the harsh effects of the market, reconciling the vast majority of the populace to market institutions.
My purpose in this essay is to explore the other, less examined side of the coin: a series of arguments that democracy may be a threat to the functioning of the capitalist market.
Most of these arguments begin with the assumption that as an information and incentive system, the market tends to be more efficient than representative democracy. It was Adam Smith, in The Wealth of Nations (1776), who explained why productivity tends to increase with the expansion of the market. The existence of a market in which supply and demand, rather than political fiat, determine prices creates monetary incentives for entrepreneurs, landlords, and workers to move their resources into the most profitable use. Prices and wages supply information indicating where effective demand is greater than supply. For entrepreneurs, landlords, and workers, prices act as signals; and larger profits, rents, and wages offer monetary incentive to follow those signals.
In the twentieth century, theorists such as Friedrich Hayek have expanded our understanding of the role of the market in providing actionable information. In a social world of remarkable complexity, in which prices are affected by everything from the weather to political developments to ongoing changes in the tastes of billions of consumers, prices are "sound proxies for relevant information, proxies that every day allow billions of people to make adjustments to new supply and demand circumstances of which they may be entirely ignorant." (1) All of the critical analyses that follow assume that because the competitive market is more productive, efficient, and innovative, it tends to produce a rising standard of living.
A rising standard of living, in turn, tends to be conducive to democracy. Indeed, modern democracies derive no small part of their legitimacy from their ability to provide a rising standard of living. Modern society, in Ernest Gellner's trenchant characterization,
is the only society ever to live by and rely on sustained and perpetual growth, on an expected and continuous improvement.... Its favored mode of social control is universal Danegeld, buying off social aggression with material enhancement; its greatest weakness is its inability to survive any temporary reduction of the social bribery fund, and to weather the loss of legitimacy which befalls it if the cornucopia becomes temporarily jammed and the flow falters.... (2)
A growing economy also blunts political conflict, since it allows for some degree of redistribution of wealth, in which increasing the income of some need not come at the expense of others.
Economic growth is of course not the only good in life or in politics, and polities with other strong sources of legitimacy can weather substantial economic downturns and even depressions. But historically, economic stagnation and decline have often spelled the end of representative democracy, as was so often the case in interwar Europe.
But can democratic political processes themselves contribute to economic stagnation or even decline? The question is bound to occur, especially to anyone observing recent attempts in Western Europe to reform pension systems, taxes, and labor laws in order to reinvigorate stagnant economies. (3)
The notion that political interests may distort or diminish the potential beneficent effects of the market precedes the democratic age. We find powerful statements of such arguments in the works of Adam Smith and Edmund Burke. It was a major theme of The Wealth of Nations. Most of the first half of the book explains how the capitalist market, under the right conditions, can lead to "universal opulence"--an ongoing rise in the standard of living for the vast majority... |
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