For decades, socio-economists have pondered on the “lead and led” relationship between economic freedom and political democracy. On the one hand, the Lipset hypothesis argues that economic prosperity, measured as increases in the standard of living, is the prerequisite for democracy (Lipset 1959; 1994; Lipset et al. 1993). However, after examining panel data from over 100 countries from 1960-90, Barro (1996) argued that economic freedom encourages economic growth, but that democracy can retard growth, and he concluded, “the overall effect of democracy on growth is weakly negative.” At most, democracy helps economic growth only at a low level of political freedom. Once a moderate level of freedom is achieved, democracy, in the form of severe income redistribution and political positioning that can lead to the dominance of interested groups, actually retards growth. On the other hand, the advocates of democracy (for example, Friedman 1962; Pourgerami 1994) believe that the two are mutually reinforcing and that democracy serves to foster economic growth.
The fundamental problem in the lead and led relationship is the blurred division between the two disciplinary areas of politics and economics. While politics studies the organization of authorities, institutional power, and the monitor of authority, economics studies the organization of resources. They are, in fact, separate disciplines. Classical economic analysis states that when individuals maximize their welfare, in aggregate the society's welfare is maximized. Complications arise when individuals have different levels of endowment, in terms of either physical resources or financial or human capital, and some individuals with low endowment face the problem of economic survival. The market system does help, to some extent, to channel individual endowment through prices. The resources spent on individuals with low endowment have to come from somewhere, and so the government must act as the “monitor” or “social planner.” This requires redistribution of resources, but there is no natural law on redistribution as it is always an artificial process. How much the “haves” should give to the “have-nots” and what is an acceptable level for the “have-nots” to have are obviously normative, often political, decisions. Politics, therefore, infiltrates into the redistribution