Democracy and Capitalism – are they compatible?

Although there have been arguments that democracy and capitalism are incompatible no advanced capitalist democracy has been relegated out of high-income countries or reverted into a totalitarian state. It seems that in advanced economies democracy and capitalism seem to promote each other. However the next few years will test this theory as inequality starts to threatens the foundations of democracy.

Economist have given their views as to why capitalist democracies might fail. The oldest worry is that the masses will vote to take possession of the wealthy and without secure property rights there can be no capitalism. Here are the thoughts of some economists:

However what explains why democracy and capitalism have co-existed for so long? Iversen and Soskice in their book “Democracy and Prosperity’ see capitalism and democracy as potentially mutually supporting, with three stabilising pillars.

  1. Strong government – constraining the power of large firms and labour unions, and ensures competitive markets. Weaker countries find it harder to resist the short-term expediency of securing power by protecting monopolies.
    a sizeable middle class, forming a political bloc that shares in the prosperity created by a capitalist economy.
  2. large firms that are not mobile – they cannot break their connections with local skilled networks where business plans and frontier technologies require the know-how developed and dispersed.
  3. Immobile companies give governments a degree of sovereignty which they use to boost the middle class. The middle classes dictate to feeling confident about the economy but a sharp slowdown in growth in real median incomes, could strengthen the appeal of movements that threaten to disturb the status quo. Governments, too, are becoming less responsive to middle-class priorities. America’s is too dysfunctional, and Britain’s too distracted by Brexit, to focus on improving education, infrastructure and the competitiveness of markets.

Conclusion

Demographic change might also take a toll: older and whiter generations may not much care whether a would-be middle class that does not look like them has opportunities to advance or not. Then, too, the authors may have underestimated the corrosive effect of inequality. Threatening to leave is not the only way the rich can wield power. They control mass media, fund think-tanks and spend on or become political candidates. Proud democracies may well survive this period of turmoil. But it would be a mistake to assume survival is foreordained.

Source: The Economist – Economic stress and demographic change are weakening a symbiotic relationship. Jun 13th 2019

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