The assertion here is that capitalism poses a threat to democratic governance, however, not only do I disagree with this statement, but I feel that democracy and capitalism go hand in hand. We just have to look to history to find the compatibility between the two, where we can see that democracies thrive with a capitalist economy, taking the example of contemporary Switzerland among others. Throughout the essay I will explain my view that capitalism leads not only to stability, but also to a higher level of political freedom, as outlined by Friedman. Also, I will look at why a centrally planned economy is inferior to a free market decentralized economy, as outlined by Hayek. Furthermore, I will talk about how capitalism recognizes the paradoxical effect of state intervention in citizens lives and finally I will talk about the view on how a viable economy depends not on altruism, but on self-interest.
Before critiquing this assertion, it’s important to define what I mean, when I talk about the concepts at hand here. Capitalism, in its purest form, is the private ownership of the factors of production. The four factors of production (Amadeo, 2019) are entrepreneurship, capital goods, natural resources, and labor. However, throughout history many different forms of capitalism have been used, the one I refer to is responsible capitalism. This is where there is a free market economy, but the difference here is that responsible capitalism requires a degree of government intervention to avoid the excesses and inequalities of capitalism. This type of capitalism is similar to Britain’s as it protects those who are unable to work through an ‘extensive welfare state’ (Pettinger, 2017). Responsible capitalism also contains a progressive tax system with higher earners paying higher taxes and also although most industries would be in the private sector, social benefits would be government run. This type of capitalism is hugely different to extreme capitalist theories such as anarcho-capitalism we see from economists such as David D. Friedman, as it allows for state intervention when it is needed while still disagreeing with the need for a centralized economy in the hands of the government.
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Next, we can define !!!! threat as ‘a person or thing likely to cause damage or danger’. From this we can see the title states that capitalism is likely to danger democratic governance. In my critique I will show why this is in fact not the case.
Furthermore, to define democracy I will use the Greek translation for the word, where it originated from. ‘Demos’ can be translated to people, and ‘kratos’ is translated to power. So, democracy in its rawest form is power of the people, or as Abraham Lincoln said “Power of the people, by the people, for the people”. However, in this instance I will be referring both to direct democracies, such as we can see in Switzerland, where any changes to the constitution have to be done through a referendum, and liberal democracies, otherwise known as indirect or representative democracies such as the UK and the United States. These states can also be seen as examples supporting the theory of democratic capitalism, which combines liberal democracy and capitalism in support of individual freedom and pluralism. This is a theory of people such as Michael Novak (1993) and Robert Benne (1981).
Capitalism in a Democracy Leads to Stability of the State
Many economists such as Marshall (1950) argued that capitalism led to instability due to wealth disparity caused by capitalism, however when we look to real world examples, we can see this is not the case. In fact, I argue that capitalism in a democratic society of most types leads to stability of the state. Firstly, take the example of Switzerland, whose society is a direct democracy, one of the only direct democracies in the world. Using the Fragile States Index we can see that Switzerland are the 3rd most stable state in the world, as well as having the 2nd highest GDP per capita in the world according to both the IMF and World Bank rankings. On top of all this, they have been ranked as the 4th freest economy in the world according to ‘CEOWORLD Magazine’. This shows us that capitalist economies can thrive even in direct democracies, therefore disproving Marshall’s beliefs.
Secondly, I argue that capitalism can thrive in liberal democracies and representative democracies, taking the example of New Zealand. According to ‘The Economist’ and the 2018 Democracy Index we can see that New Zealand ranked as the 4th most democratic country in the world, as well as being the 7th most stable state in the world, also coming from the Fragile States Index. ‘CEOWORLD Magazine’ also rank New Zealand as the 3rd most free economy in the world.
These two countries are examples of how not only capitalism doesn’t threaten democracy, but in actual fact they thrive side by side. This supports my stance that capitalism leads to stability, and this is because free economies and economic freedom in turn lead to political freedom.
Economic Freedom Leads to Political Freedom
Another reason capitalism is not a threat to democracy is because of the economic freedom it creates. As Friedman said, a decentralized economy and a free market allows economic power to be widely dispersed and takes away the economic coercion of the government within non capitalist states. Therefore, if political freedom is absence of coercion from fellow men, then the capitalist system is one that contributes to democratic freedom.
This can also be backed up by one of the most important philosophers for capitalism, Ayn Rand, who in her book ‘Capitalism: The Unknown Ideal’ states, “the first question to answer… Is man free? In mankind’s history, capitalism is the only system that answers: yes”. She also states “without property rights, no other rights can be practiced”, which shows us that without the economic freedom that capitalism brings, political freedom ceases to exist. This is because the inability to thrive and support your own life through the “effort and guidance of his own mind” (Rand, 1967), makes you a slave to the state, who can control your effort and your produce.
We can see from these two philosophers, that without economic autonomy and freedom, your political freedom is reduced to nothing. As Friedman said, “history suggests that capitalism is a necessary condition for political freedom”.
Inferiority of Centralized Planned Economy
Philosophers and political theorists over time have argued that centralized planned economies such as Stalin’s 5 years plans are superior to capitalist systems, which, as argued by Lenin (Lenin, 1917), are “Democracy for an insignificant minority, democracy for the rich”. However, as Rand (1967) says in reply, Lenin argued that industrialization would bring them abundance and help them surpass the Capitalistic West, yet at that point, Soviet Russia was unable to feed their own people. This shows that even one of the fathers of industrialization was unable to succeed with a centralized economy. This is because centralized economy as inherently inferior.
Whereas a free market allows people to succeed based on their own merits, a meritocracy to some extent. Also, free markets provide for protection unlike centralized economies which is argued further by Friedman. Friedman's argument can be summed up by stating that a free market protects consumers, sellers, employers and employees from coercion as there is always another option for them as Capitalism is fundamentally a voluntary freedom of exchange. This freedom of exchange takes away centralized power from the state, and leaves the fluctuation of power to change because as Friedman states, “there is no law of conservation which forces the growth of economic street to be at the expense of existing centres”. This states that economic growth, contrary to what Lenin says, does not have to be at the expense of other people. Therefore, supporting the view that a free market allows people of any background to succeed, unlike a centralized economy, where no one succeeds.
Furthermore, Hayek states in his book, ‘The Errors of Socialism’, that centralized economies (socialism) seem sensible at first glance however when it has been tried in history, it has never been as efficient or effective in democracies as capitalism. This is because, as Hayek says, “the whole idea of ‘central control’ is confused”. Centralized economies create a monopolization from the state and reduce the choice for consumers therefore reducing the efficiency of the system.
Capitalism Recognizes the Paradoxical Effect of State Intervention in Citizens Lives
Penultimately, we can look to the father of capitalism, Adam Smith to show the dangers of state intervention. In his most well-known book, ‘The Wealth of Nations’, Smith argued that state intervention lead shortages and surpluses, as can be seen in Soviet Russia under Lenin. This view is widely accepted by capitalists.
However, I do not believe there should an elimination of the government. Friedman also had the view that the government was essential for regulating and interpreting the ‘rules of the game’, as well as being responsible for peace and justice. The free market however takes away the power of the state in certain issues.
Furthermore, although responsible capitalism involves an extensive welfare system, this is purely for people who are unable to work. Systems such as communism and socialism allow take away the drive of people to work. This is because state intervention allows for people to ‘sponge’ off the government. Whereas a capitalist system incites people to work. Rand (1967) argues that in a capitalist state, “those who are unwilling to work remain unrewarded”. She then goes on to argue that if you work hard, you are rewarded. This supports the claim of a meritocracy that democracies hold and shows how capitalism supports democracy.
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