Democracy and Capitalism

Over the course of history, societies have devised various forms of economic production and distribution. In low-technology societies it’s a question of who hunts, who gathers, and how the roots and meat will be distributed. The production may be simple, but these are nevertheless political decisions. Production and distribution are much more complicated in higher-technology societies, and so are the political decisions. Within the past 100 years, intellectual debate has focused on the relative merits of capitalism and socialism as means of production and distribution, and democracy and authoritarianism as the means of political decision-making.

When considering the economic arrangements of capitalism and socialism, it’s important first to define the terms. Capitalism has been defined as “an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations.” Socialism, on the other hand, has been defined as a "theory or system of social organization that advocates the vesting of the ownership and control of the means of of production and distribution, of capital, land, etc., in the community as a whole."

The two forms of political decision-making, democratic and authoritarian, can be combined with either economic model. Thus there can be authoritarian capitalism [fascism], authoritarian socialism [communism], democratic socialism and democratic capitalism.

The only successful “democratic socialist” communities I am familiar with are those of the “Hutterites” in the USA. The Hutterites hold their means of production in common and practice democracy with respect to management of the community. But this is facilitated by their being homogeneous, small communities of religiously like-minded individuals.

These are not conditions shared by huge, complex and diverse societies. For such societies there are too many economic decisions necessary to resolve all the issues of production and distribution by community vote. These societies, when they are democratic in their political decision-making, evolve by default into economies which include capitalism.

The mixture of democracy and capitalism is not without its problems. There is always the danger of capitalism undermining democracy. As the following scholars note, democracy requires that capitalism be regulated.

Robert Reich

“The purpose of democracy is to accomplish ends we cannot achieve as individuals. But democracy cannot fulfill this role when companies use politics to advance or maintain their competitive standing, or when they appear to take on social responsibilities that they have no real capacity or authority to fulfill. That leaves societies unable to address the tradeoffs between economic growth and social problems such as job insecurity, widening inequality, and climate change. As a result, consumer and investor interests almost invariably trump common concerns. ...[F]or those of us living in democracies, it is imperative to remember that we are also citizens who have it in our power to reduce these social costs, making the true price of the goods and services we purchase as low as possible. We can accomplish this larger feat only if we take our roles as citizens seriously.”

Nobel laureate Robert M. Solow, Institute Professor Emeritus (economics):

"My most deeply held political belief is that power corrupts. Therefore, for me, the basic problem of democracy is to avoid undue concentrations of power. Capitalism has going for it that on paper at least it separates economic power from political power. It turns private property into a buffer for the individual against the state.

"But laissez-faire capitalism tends to generate vast inequalities of income and even vaster inequalities of wealth. And there's an endemic tendency in capitalist democracies for the very wealthy to want to buy political power... so we can end up where socialism ends up, only by the back door, with economic power and political power sitting in the same hands," said Professor Solow. This situation suggested to him that "partially regulated capitalism" would be best for democracy, he said.

Nobel laureate Kenneth J. Arrow, the Joan Kenney Professor of Economics and a professor of Operations Research (emeritus) at Stanford University:

"It's quite clear that economic growth is helpful in a democracy. It's also clear that capitalism itself doesn't work very well when it's not regulated and when there aren't checks and balances on it. Only a democracy, a powerful democratic state with access to free information by all citizens, can provide those," Professor Arrow concluded.

Suzanne Berger, the Raphael Dorman and Helen Starbuck Professor of Political Science and director of the MIT International Science and Technology Initiatives (MISTI):

“…The pressing question of our times is, she said, "What's going to happen to the fit (however surprising) between capitalism and democracy in the context of global capitalism? Democracy and capitalism have been compatible all these years because, until recently, capitalism had been largely contained within national boundaries. Within domestic societies, governments acted to cushion the most disruptive features of capitalism, business cycles, unemployment, inflation, depression, environmental degradation. Globalization means that more of the world's population everywhere becomes more vulnerable to economic forces outside their own country.”

Dr. Berger's observation suggests to me that national governments will eventually have to coordinate economic regulation, perhaps beginning on a regional basis. This has already been accomplished in several regions with respect to military defenses.