Introduction: Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned. Under capitalism, the state is separated from economics, and it is the system of political freedom. In the dictionary definition, democracy “is government by the people in which the supreme power is vested in the people and exercised directly by them or by their elected agents under a free electoral system”.
Two great economists of the last generation, Max Weber and Joseph Schumpeter, have explained the link between democracy and capitalism (Cereijo, 2007). Weber contended that democracy in its clearest form can occur only under capitalist industrialization, in the presence of individual responsibility. According to him history clearly confirms that modern democracy was born along with capitalism and has a casual connection with it. Schumpeter was even more emphatic (Almond, 2002). He stated that modern democracy is a product of the capitalist process, and the two were mutually supportive parts of a rising modern civilization (Schumpeter, 1947).
Often it is believed that democracy dampens development whereas capitalism favors development. In the non-communist state, private individuals inspire economic development, because they own the major portion of the nation’s resources. Since individuals are selfish by nature, they ordinarily improve their economic welfare if they enjoy ‘fair freedoms’ meaning that the social environment of fair freedom is the key to economic development in the non-communist state.
This implies that the desirable functioning of capitalism is the clue to economic development, which can be possible only through democracy. Democracy is the only system of governance that can guarantee long term peaceful functioning of the capitalist economy.
Thesis: Democracy is needed as a means to a successful capitalist economy.
Capitalism and its success: There are at least six characteristic features of capitalism: private property, freedom of enterprise and choice, self-interest as the dominant motive, competition, reliance on the market system and a limited role for government (Krkac, 2008). Under capitalism, the individual’s pursuit of his own economic self-interest benefits the economic self-interests of all others (Cereijo, 2007).
The theoretical foundation of capitalism was laid down by the Scottish philosopher Adam Smith in 1776 in his famous classic, An Inquiry into the Nature and Causes of Wealth of Nations. According to Smith’s theory, individuals are selfish by nature. With respect to economic activities, some individuals find great pleasure in creating and accumulating private wealth. If these individuals are allowed to pursue their selfish endeavors, they will promote their own economic welfare, which will eventually lead to the material progress of whole society. In the words of Adam Smith, “By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention”(Smith, 1789).
The passage that is most often quoted from the Wealth of Nations in this regard, is the following: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their self-interests; we address ourselves not to their humanity but to their self-love and never talk to them of our own necessities but of their advantages”(Smith 1789, pp 26-27). This is the idea of an affluent economy of the non-communist state that Smith formulated in the Wealth of Nations.
It was Karl Marx who popularized his theory as capitalism. Marx believed that the institution of private property was the main source of all evils in human society and that capitalism would eventually collapse and be replaced with communism. What he criticized and detested was capitalism’s exploitative nature. The closest any country has come to pure capitalism is 19th century America. Twentieth century America is not a pure capitalist country, but is a “mixed economy”: a mixture of freedom and controls. More recently, countries such as Singapore, South Korea, and Chile have enjoyed enormous success by embracing capitalism and developing their economies (Di Tella and MacCulloch, 2007).
Democracy and its success: Democracy refers to a political system in which the political part of the government is elected through adult suffrage. In a democracy, it is assumed that people are the owners of the sovereign power of the state, who rule, and are ruled simultaneously, by electing their deputies. The pillars of democracy are: sovereignty of the people and government based upon consent of the governed, majority rule, minority rights, and guarantee of basic human rights, free and fair elections, and equality before the law, due process of law, constitutional limits on government, social, economic, and political pluralism and values of tolerance, pragmatism, cooperation, and compromise (Krkac, 2008).
Democracy as it was originally founded in Athens was direct democracy, because the voters were also the governing authorities. Today’s democracies are called indirect or representative democracy, since elected politicians make all kinds of decisions in public institutions. In democracy, the sovereign authority lies with voters. This premise requires that voters be assumed as numerically equal, which, in turn, makes protecting and promoting voters’ liberty as the state’s fundamental function.
From the Middle East to Latin America and Asia, many autocracies are taking gradual steps towards more democratic forms of government. The US administration is determined to consolidate political freedoms in many developing countries under its sphere of influence. Though democracies are beneficial from the administrative point of view, studies show that not all democracies are economically successful. Only a democracy born in an open economic environment, with a well-functioning market system, widespread foreign direct investment, and sizeable international trade, is likely to consolidate economic liberalism, stabilize expectations, and hence lead to more investment and faster growth.
Conversely, if an economy is tightly controlled by the state, has protectionist barriers against foreign imports and capital movements, or relies on rents from exhaustible resources to obtain foreign currency, transition to democracy can be plagued by populism and struggles for redistribution, hurting economic growth. Empirical evidence supports the idea that the success of a democracy depends on the openness of the underlying economic system at the time of political transition. Countries that preceded democratic transitions during the post world war II period with economic reforms include Chile and South Korea in the late 1980’s and Mexico in the mid-1990’s.
Conversely, when democratic transition was attempted in a fragile and closed economic environment, the outcome was much worse. This applies to the episodes of democratization in Latin America and the Philippines in the mid-1980’s, but also to Turkey in the early 1980’s and Nepal in 1990. China first opened its economic system to the rest of the world, and only now is it thinking about political reform. Russia instead jumped into democracy. The Chinese path seems much more likely to lead to lasting economic success.
Conclusion: Capitalism and Democracy
Capitalism and Democracy complement each other very well. An important reason for this is that, in order to create a successful market system, the state must respect basic individual rights: the rule of law, private property, and the enforcement of justice. These fundamental rights are part and parcel of democratic government. But when it comes to economic development, these fundamental rights are more important than other purely political aspects of democracy, such as universal suffrage and genuine political competition. This is how the Western world became democratic in the nineteenth and twentieth centuries.
Economic liberalism came first, political liberalism later. Economic development in the non-communist state is inspired by private individuals, because they are the major owners and users of a nation’s economic resources. Individuals are naturally propelled to improve their economic welfare when they enjoy ‘fair freedoms’. Capitalism is the economic system in which they enjoy fair freedoms – i.e. to pursue their economic ambitions.
Thus, the key to economic development in the non-communist state is desirable functioning of its economic system, capitalism. And, democracy is the only system of governance of the non-communist state that can guarantee peaceful and long term functioning of the capitalist economy (Tabellini, 2005). Thus a capitalist economy that is top priority in a politically democratic country is the ideal route to economic success. Moreover, capitalism is positively linked with democracy, shares its values and culture and facilitates its development (Almond, 2002).
Bibliography
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Di Tella, Rafael and MacCulloch, Robert (2007). Why doesnt capitalism flow to poor countries? Working Paper 13164. National Bureau of Economic Research.
Fitzgibbons, Anthol (1995). Political Foundations of the Wealth of Nations. Clarendon Press. Oxford.
Krkac, Kristijan (2008). The conflict between capitalism and democracy: An essay in the philosophy of economy. Web.
Schumpeter, Joseph (1947). Capitalism, Socialism, and Democracy. Routledge Publishers. London and New York.
Smith, Adam (1789). The Wealth of Nations. Modern Library Classics. London and Edinburgh.
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