In 1991 the world witnessed the collapse of the Soviet Union and an end to nearly 75 years of communism in Russia. In trying to democratize his nation and restructure its economy whilst at the same time attempting to stick to the ideas and principles of socialism, Gorbachev had presented himself with an enormous challenge, one that he had been unable to meet. It was at this time that Francis Fukyama claimed that history had ended. Fukyama believed that history was essentially the struggle between different ideologies, each trying to gain supremacy over the others.
She claimed that the fall of the Soviet Union symbolized the end of all ideological alternatives to capitalism; in short the west had won. As the vast majority of capitalist western countries were also democracies, the connection between the free market economy and democracy seems to be a clear one. The western countries, all with stable democratic governments had economies based on the ideas of the free market economy. Those countries that didn’t have this system were seen as oppressive dictatorships, such as Russia and Nazi Germany.
However, it cannot simply be said that all democracies are built on capitalism and that all state controlled economies belong to oppressive dictatorships. The idea of democracy and capitalism co-existing side by side is a contentious issue and one that has generated countless books and articles. This essay will look at some of these writings and will try and establish why some think that capitalism and democracy are contradictory and others believe them to be an essential partnership. In contemporary terms a democracy can be defined in three basic ways.
The first is a direct democracy where every citizen has the right to make political decisions under procedures of a majority rule. The second is a form of government where the individual citizen exercises the same power as in a direct democracy but instead this is done through a representative chosen by them and accountable to them. The third way is known as a constitutional democracy. This is usually a representative democracy where all the citizens enjoy basic rights such as freedom of speech within the framework of a written constitution.
What all these different systems have in common is that in each case the citizen has a certain amount of freedom. Freedom to practice any religion they choose, freedom to live their lives as they choose, in essence, freedom of choice. Of course this is a gross simplification of democracy but for the purposes of our argument it will suffice. This is because, as we will see, the main arguments for and against a capitalist economy are all based upon the notion of freedom. Marxists argue that the capitalist system enslaves the lower classes whereas supporters of it believe it is essential in maintaining liberty.
The main opponent to capitalism has long been communism. This is a system of political and economic organization in which all property is owned by the state and is shared out equally amongst its citizens. These ideas, based on the writings of Karl Marx and Friedrich Engels, believed that once this communist society had been established there would no longer be the social excess that leads to the exploitation of the people. It also believed that the masses would rule themselves in peace ‘without the special apparatus for coercion known as the state’.
Lenin saw democracy in a capitalist society as ‘hypocritical and false through and through’. Only in a system where the masses were free from ‘wage slavery’ would there be a truly democratic government. ‘Democracy for an insignificant minority, democracy for the rich – that is the democracy of capitalist society’. This is Lenin’s view of how democracy functions within a capitalist system. He believed that there were restrictions placed upon a democracy designed to exclude poorer people from the process.
These restrictions included the ‘capitalist organization of the daily press’, the way in which the representative institutions functioned and the ‘supposedly petty’ details of suffrage. In Lenin’s ‘The State and Revolution’ he believes that the whole idea of a capitalist democracy is a fai?? ade, one that only gives the proletariat the impression that they are somehow influencing the way their country is run. He believed Marx summed it up perfectly when he said ‘the oppressed are allowed every few years to decide which particular representatives of the oppressing class shall represent and repress them in parliament’.
From the writings of Lenin and Marx it is clear they thought that the idea of a capitalist democracy was an illusion, perpetrated by those in power to secure their positions and make sure that they had a constant supply of cheap labor. However, when the Bolsheviks took power of Russia in 1917 there was not this utopia of political freedom and economic abundance. Instead the populace was to be subjected to decades of totalitarian rule and economic hardship. By the time Stalin came to power the Soviet Union could no longer be called a true communist state.
Although it still used the ideas of collectivization, this has just become another tool used to suppress the peasantry. Despite the vast steps taken towards industrialization little was returned to the ordinary citizen in way of ‘consumer goods or amenities of life’. Although it would appear that Lenin genuinely believed that Russia would be the most ‘democratic of parliaments in democracy’ in fact in just a few years it had evolved into one of the harshest dictatorships even seen.
The reason for this is that under the pretext of creating a strong communist power Stalin was able to construct a vast bureaucratic network that was able to control all aspects of people’s lives. By controlling everything from the media to what people did in their spare time Stalin was able to create an almost unassailable dictatorship. Lenin’s dream had not only failed but had achieved a level of suffering and lack of freedom that arguably surpassed that of any capitalist system before or since. This leads on to the argument for the free market, capitalist system.
The main argument for the free market economy is that it is by far the best-known way of organizing economic activity. The idea of the ‘invisible hand’ controlling the economy and guiding it to the best allocation of resources needed to maximize output is one used by all of the world leading economies, including all of the G7 industrialized nations. The free market system is one where the means of production are privately owned and prices and production levels are guided through the operation of the market.
In the free market system the output of a product is determined by the willingness of the consumer to buy it. The idea of consumer sovereignty is key to the success of a free market economy. Neither the consumer nor the producer is forced to enter into an exchange with anyone else against his or her will. The individual, or household, has a resource that they can trade to their maximum benefit, whether that is an actual product or their labor. By doing this the household can sustain itself by providing services for others rather than being self-sufficient.
As the economy advances this method becomes more advantageous for the household and allows specialization in production. Obviously our economy has advanced far beyond simply a collection of households. Industry and private enterprise has provided intermediaries between households as both consumers and producers. Through this system consumer sovereignty is preserved, as all the enterprises are private. Therefore both parties are free to enter into a transaction or not. The consumer does not have to buy something of a producer, as there are other producers available.
In the same way the producer does not have to sell to that customer, as there are other consumers available. This market equilibrium between supply and demand allows both household and private enterprises to enter transactions only when it is beneficial to both parties. It is not in the interests of the producer to double their prices as the consumer can go elsewhere. It is also not in the interests of private enterprise to suddenly half the wages they pay as this would lead to knock on effect that would damage their own business.
It is this freedom of choice that exists within the free market economy that is so important to democracy. In many ways the free market economy enjoys even more freedom than a democratic political system. It is a perfect system of proportional representation; each consumer can have what he or she wants even if they are in the minority. The vast majority might prefer Cadbury’s chocolate but those who disagree can have their pick from the other makes available. This is better that its political equivalent as usually the minority vote is overruled by the majority.
According to Hayek, centralized planning not only leads to a significant loss of efficiency but also a loss of liberty. Hayek believes that a centrally controlled economy can never be as successful as a free market system because there are too many variables involved when trying to plan how things should be produced. The whole concept of a small committee trying to organize the allocation of resources could never work Hayek argues. It is claimed that it would not be possible to correctly predict the future needs alongside ‘the present needs’.
Friedman also believes that the free market economy is not only the best way of using resources and argues this point even further. He goes on to say that although the idea of laissez-faire is key to the success of the free market economy, the government still plays a vital role in preserving the stability of the system and protecting consumer sovereignty. Friedman states that the government serves an important role in setting the ‘rules of the game’. The government is fundamental in stopping what can be the main problem with a free market economy, monopoly.
When one producer uses there market position to become the only supplier of a product. When this happens the producer can set price levels so that they maximize profits. In these cases commissions such as the Monopolies Commission in the UK are brought in to stop this and preserve near perfect competition. This is perfect example of how the government can influence the economy to protect consumer sovereignty whilst maintaining laissez-faire. Friedman makes the important point that whilst capitalism is a necessary condition for political freedom, it is not a sufficient condition.
Friedman gives many examples of countries that had free economies but could never be said to have political freedom, such as ‘Fascist Italy and Fascist Spain, Germany at various times, Japan before World Wars I and II’ to mention just a few. He also make the valid point that there has never been a politically free nation that wasn’t built on the ideals of the free market, from early Greece and Rome to modern powers like the US and Britain. It is this point that perhaps makes the best case for proving that democracy and capitalism can not only exist together, but actual support each others ideal and ideologies.
In theoretical terms communism would appear to be the perfect combination of economic abundance and political freedom. However, wherever it has been attempted it has been corrupted and become rule by the few. Although the same could be said about the capitalist countries of the west they do enjoy a better quality of life than their communist counterparts. What most advocates of the free market system seem to propose is that the reason capitalism is such an important part of democracy is because if ‘economic power is kept in separate hands from political power, it can serve as a check and a counter to political power’.
Where the economic and political powers lie in the same place they are vulnerable to corruption and misuse. As Hayek states it is the ‘dispersed and decentralized nature of knowledge in a market that enable individuals to be autonomous and free’. Any involvement beyond what Friedman sees as simply refereeing the game by the government results in a loss of liberty. It is easy to sit in a prosperous free market democracy like our own and fail to see how capitalism can ever be seen to undermine freedom. We have an accountable, parliamentary democracy that appears to function satisfactorily.
We have almost universal adult suffrage, freedom of speech and freedom of religion; we have even adopted socialist ideals like the welfare state and the NHS. At the same time as this we have a successful growing free market economy, we have stocked supermarkets and access to luxuries such as cars and holidays. Surely this is the antithesis of the Marxist view that capitalism undermines democracy. However, these examples of democracy and capitalism successfully coexisting are fine when looked at as individuals cells, such as the US or Britain. It is not so clear whether or not they coexist so well when we look at the world economy.
It is fair to say that the US is considered by many to represent the pinnacle of a capitalist democracy. It prides itself on its constitution and it representative democratic system. It is the home of big business, private enterprise and multi-national conglomerates. However, there are many cases in recent history where the US has been involved in undermining democratic governments because they were either communist or possessed large quantities of natural resources such as oil. There have also been many cases where the US traded with brutal dictatorships when it was in their interests, turning a blind eye to the atrocities being committed.
Therefore although capitalism and democracy can exist in certain places, the freedom and abundance of goods found in one country is often balanced by the suffering and hardships found in another. This is not just found at a government level either; many of the goods imported into rich western nations come from third world countries. Although public awareness has never been higher about the problems these countries are facing and issues such as fair trade are big news, people are still not willing to sacrifice their lifestyles. Fairtrade coffee is one thing, but Fairtrade Nike trainers are along way off yet.
Therefore free markets do support democratic ideals, if you happen to live in a thriving western country. In political terms the free market economy is a representative democracy, where each individual can enter into a transaction voluntarily, without coercion. It is hard to see how one could be considered to be politically free without these basic rights. So whereas capitalism supports democracy in those countries with established economies, it can undermine it in those exploited countries that are forced to do the ‘dirty work’ as it were.