Capitalism and Democracy

By Foulkes, Arthur E. | Freeman, November 2006 | Go to article overview

Capitalism and Democracy


Foulkes, Arthur E., Freeman


I recently heard a prominent American politician tell how a "chill" went up his spine when he heard someone question the importance of democracy. How could anyone doubt the value of democracy? he wondered. Fortunately, he said, he soon realized that by "democracy" his (European) interlocutor really meant "capitalism." Whew, he thought, that's all right, then. But is democracy really more important than capitalism?

One immediate problem we face discussing democracy and capitalism is that both terms have different meanings for different people. For some people "capitalism" is synonymous with "corporatism" or "crony capitalism," which combines nominally private enterprises with a highly interventionist political system-indeed, something like the U.S. system today. Likewise, "democracy" for some is synonymous with social and economic equality. For them, no democracy can exist when some people live in poverty, some cannot read, and others live in mansions or attend Ivy League schools.

For my purposes, however, democracy will be defined simply as "the people rule," or, more specifically, "majority rule." While it's true that almost everyone would agree that democracy also requires certain guaranteed freedoms, such as freedom of the press, freedom of speech, and the right of habeas corpus, even these freedoms are subject to limitations when public opinion permits-as any number of examples from periods of crisis in U.S. history can demonstrate.

Capitalism, on the other hand, will here refer to a free-market economy with guaranteed property rights-a laissez-faire society. Indeed, a free market is simply one in which the unhampered exchange of property titles can take place. Thus in a truly capitalist society, government's role would be strictly limited to protecting property rights (including the right to our bodies) since virtually any other government activity would almost certainly involve the violation of those rights. Thus by this definition, the economic system capitalism necessarily implies a (classical) liberal political system.

Democracy, however, makes no promises regarding the size and scope of government. Indeed, it could be argued that democracy is inherently hostile to limited government since many citizens in a democracy (including many so-called "capitalists") soon find they can successfully lobby government officials for subsidies, trade protection, and other legal privileges. Likewise, elected officials soon learn it is in their interest to strategically grant economic favors for their own political and electoral needs. As economist Randall G. Holcombe noted in "Liberty and Democracy as Economic Systems" (Independent Review),"[T]here are inherent tensions between democracy and a free-market economy that make it difficult to maintain a stable system. In particular, the ascendancy of democracy threatens the survival of the free-market economy, which was built on a foundation of liberty.... [T] he evolution of democracy has come at the expense of liberty."

Or as economist John Wenders wrote in Tlie Freeman: "Democracy evolves into kleptocracy."

The original design for the American government was one that attempted to combine limited democracy with limited government. But it didn't take long for this ideal to begin to dissolve.

One of the first blows came when George Washington was president, during a debate over the meaning of the Constitution's Necessary and Proper clause. Washington and a congressional majority planted some of the first seeds of big government when they accepted the argument of Treasury secretary Alexander Hamilton, who contended that the clause (taken along with the fact that the Tenth Amendment's reservation of state powers failed to include the word "expressly") gave the federal government powers beyond those specified in Article I, section 8. Hamilton's vision won the day despite opposition from Thomas Jefferson and the Constitution's principal author, James Madison, who feared that "such a broad interpretation of the 'necessary and proper clause' would allow the federal government a reach far beyond the intentions of the Constitution's framers. …

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