Some Thoughts on Capitalism and Democracy

What exactly is the nature of the relationship between capitalism and democracy? It is, if not an age old question, one that has puzzled and motivated scholars at least since Adam Smith penned The Wealth of Nations. Interestingly, in those days, the field in which Smith wrote was known as Political Economy – the two disciplines had not yet split apart and developed their own specialties and areas of expertise. Until the 20^th century, politics and economics were inexorably linked in the minds of intellectuals who sought to explain the nature of power, governance, and social relationships. Still, the idea that politics and economics influence each other – that the one may support or subvert the other, has by no means disappeared.

Marx, of course, famously found ownership of the means of production to be the primary determinant of political regime type. But even as Marxism, after a long and bloody history, has finally been discredited, the idea that economic relationships determine regime types has not. Instead, in an inversion that would have Marx rolling in his grave, the idea has been adapted to acknowledge the success and dynamism of market economies. For modernization theorists, bourgeois capitalism is now widely declaimed as an essential, if not necessarily sufficient, precondition of democracy.

The logic of this position is relatively simple: political freedoms are largely irrelevant, or at least a low priority, if one does not have enough food to eat. Dire poverty precludes meaningful political participation by forcing individuals to focus on the basic necessities for survival. Only once a certain threshold of material wealth has been reached can democracy (and the civil liberties and rule of law that support it) flourish. Empirically, there is a lot of evidence to back up this assertion, as capitalism and democracy have largely grown up together in the modern world.

This is, unfortunately, a controversial position, and modernization theory is not without its detractors. Partly, this is the fault of the modernization theorists themselves. The causal mechanisms by which economic development is supposed to determine regime type have been left vague at best. In particular, the assertion that economic development causes democracy is problematic. There are at least several examples of democratic transitions that have begun in underdeveloped countries. But consolidated democracies only survive in relatively rich market economies. This is the case because the supporting infrastructure of institutions, laws, cultural norms and capitalism combine to create an overall structure of incentives that encourage individuals to cooperate in the political sphere.

But proponents of democracy find it distasteful, on a normative level, to condemn the vast majority of the world’s population that still lives in poverty to continued rule by authoritarian (or worse) regimes. They can point to India as an example of an impoverished company that has nonetheless managed to sustain democratic institutions in the more than 50 years since its independence. And while many have been forced to abandon their defenses of socialism, the counterpoint that unregulated capitalism may subvert or otherwise produce a defective and biased form of democracy is an intuitively convincing argument.

Still, many of the scholars who write on the relationship of capitalism and democracy have lost sight of the fact that what really makes democracy possible, and, for that matter, capitalism, are fundamental rights and liberties and the rule of law. Too often these basic civil rights get lost in the proxies that stand in for democracy in scholarly articles and books. Ensconced in the tenured comfort of the ivory tower, many scholars are skeptical and even hostile to the idea that market forces may influence the type and nature of political systems, or that capitalism and democracy are complimentary, mutually reinforcing phenomena. Dependency theories are perhaps the most egregious examples of democratization theories that are hostile to capitalism. But in fact, capitalism and democracy are two sides of the same coin, operate according to similar principles and are dependent on the same prerequisites.

The key to achieving both economic growth and political freedom lies in creating incentives for individuals to act in mutually beneficial and productive ways. The fundamental mechanism for producing the incentives that lead to economic and political development is competition. But in order to create these incentives, it is necessary for states to develop strong, autonomous institutions staffed by qualified technocrats that can create and uphold the rule of law. A legal and institutional structure that protects investments, private property and the enforcement of contracts and intellectual property rights is essential for attracting and encouraging industry and investment. Likewise, the rule of law must enshrine basic civil liberties like freedoms of speech and association, protect minorities from the “tyranny of the majority,” and provide at least some means for interest articulation and political accountability.

It is true that many authoritarian regimes rule simply through the threat or use of force. Fear can be, of course, a powerful incentive and one that makes peaceful democratic transitions difficult. It is also true that capitalism, or at least the initial stages of capitalist development, can be sustained under authoritarian regimes. But the legitimacy of modernizing regimes cannot be solely based on coercive force. Individuals must be able to pursue at least some of their interests (though guided and modified by the incentive structure put in place by the modernizing regime) and believe that modernization and economic development is a good thing.

Even in authoritarian regimes like Singapore or Hong Kong, the greater part of the population has acknowledged the legitimacy of their governments and the benefits of economic growth. As time goes by and social, political and economic development progresses, demands for democratic norms and standards will increase – as present day Hong Kong attests. An advanced service economy, unlike, say, one based on raw materials production or low-skilled, labor intensive manufacturing, needs the sophisticated measures of interest articulation and accountability that democratic procedures allow for. Capitalism does not cause democracy. Rather, the two “systems” are mutually complementary and enforcing because they are based on the same principles of individual rights and freedoms. Over the long term, you cannot have one without the other, and any liberalizing reforms must, sooner or later, embrace both economic and political freedoms to be successful.

Modernization theory is not meant to condemn the developing world to continued authoritarian rule. Rather, it is (or should be) meant as a sort of road map with which under-developed countries can pull themselves out of the poverty and instability that characterizes so much of their current existence, and join the modern world. Short-circuiting this path by instituting democracy too early or condoning state interference in the economy will only open the door to populism and economic crisis. The sustainability of democracy and its consolidation can only be achieved if the underlying structure of incentives is conducive to and supportive of individual rights and freedoms. The right kinds of incentives, moreover, can only be built and maintained within the confines of strong and autonomous institutions.