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Capitalism Depends on the Survival of Democracy

Democratic backsliding is becoming a worry in the West as dissatisfied voters turn to populist leaders. We are gravely mistaken if we think that capitalist economies, which have brought so much prosperity and economic security to liberal societies, could survive the demise of the democratic institutions that fostered them.
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United States Federal Reserve Bank building on Constitution Avenue. WASHINGTON, DC, USA © MDart10 / shutterstock.com

July 02, 2023 02:58 EDT
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It’s no coincidence that democratic countries with capitalist systems typically have the highest quality of life, standard of living, economic productivity per capita, life expectancy and educational standards. Democratic systems also tend to have the lowest levels of corruption. In many countries, however, democracy is currently being challenged, which may have the potential to bring about harsh consequences. Democratic backsliding could, in turn, cripple our capitalist systems and reduce our standards of living.

Rising anxiety in the West

Radical politics do not simply come out of nowhere. Numerous critical issues in recent years have generated a great deal of fear and anger around the world, with the richest and most egalitarian countries not escaping the trend. At the core of this crisis are economic issues, from rising income inequality and economic uncertainty to the erosion of middle classes caused by negative aspects of globalization and the swift introduction of new technologies and automation.

Globalization is like fire: it can cook your food, keep you warm, or burn your house down. It has lifted millions of people out of poverty and tremendously benefited the United States and other countries. But it has not impacted all of us equally and has left many behind. Globalization has been tremendous for higher-skilled workers engaged in life-long learning, and for companies that are highly productive or producing goods and services rich in intellectual property. However, it has presented new challenges for employees with limited skills and for less competitive companies that produce low-technology goods and services.

It is important, however, not to confuse the impact of globalization with the harsher impact of new technologies and automation, which are the primary factors responsible for job losses and could threaten nearly half of America’s workforce in the next two decades.

The good news: after waves of new technologies destroy jobs, many more are created. Although we don’t know what the jobs of the future will be, we do know they will require highly skilled workers. The bad news: this process has led to rising income inequality between higher- and lower-skilled workers and is a major contributing factor responsible for eroding America’s middle class.

Economic issues, furthermore, are just part of the problem. Social and cultural issues are also contributing to the pressure. These include fear of a decline in social status, rapid cultural changes and resentment toward immigrants. This last factor is exacerbated by demographic shifts in many parts of Europe and in the United States. In the US, the white population will become a minority by 2045. Many voters in these regions and around the world are reassessing their allegiance to political leaders, turning away from long-established, center-based political parties, and moving towards populist and even authoritarian leaders on both the far right and left of the political spectrum.

Un-democratic leaders offer a tempting solution

Populists are politicians and leaders that claim to champion the interests of ordinary voters against perceived elites or special interests. To gain influence and support, they manipulate dissatisfied voters through emotional appeals, often declaring political opponents and democratic institutions corrupt, attacking the mainstream media, and attributing economic inequality to “others”: not only the political or economic ruling class, but also immigrants and foreigners.

Authoritarian leaders typically seek to consolidate power under their control, disregard democratic principles, eliminate checks and balances and suppress dissent. They accomplish this by enforcing loyal obedience among their followers, imprisoning political opponents, and subverting or intimidating the judiciary and media. Throughout history, such authoritarian leaders rarely vacate office without a fight.

Individual leaders may exhibit a mix of both populist and authoritarian characteristics with varying levels of severity. Some may utilize a more measured tone, while others employ more aggressive and confrontational rhetoric. Nevertheless, the two tendencies interact with and reinforce each other. As seasoned Harvard political scientist Pippa Norris writes, the blend of authoritarian values with populist rhetoric can be a dangerous combination.

According to Norris, over fifty political parties in Europe can now be classified as authoritarian-populist. They have gained an increasing presence in parliaments and have entered government coalitions in more than a dozen Western democracies, including Austria, Italy, New Zealand, Norway, and Switzerland. 

Many world leaders have also endorsed authoritarian and populist values to a greater or lesser degree, says Norris. These have included the late Silvio Berlusconi of Italy, Rodrigo Duterte of the Philippines, Miloš Zeman of the Czech Republic, Viktor Orbán of Hungary, Nicolás Maduro of Venezuela, Jair Bolsonaro of Brazil, Narendra Modi of India, and Donald Trump of the United States.

In the United States, several of the critical issues noted above have become more severe in the wake of the Great Recession that began in late 2007. The inhospitable economic environment this created likely accelerated American public support for populists. Consequently, the growing far right has pushed the Republican party in that direction. At the same time, left-leaning populists, finding greater public support than before, pulled the Democratic party further left of the political spectrum.

Democracy and capitalism support each other

The threat to democracy, worrying in itself, is likewise a threat to healthy free-market principles and the prosperity that they bring.

One empirical way of looking at the connection between democracy and capitalism is to study the relationship between political freedom and economic freedom at a moment in time, according to Martin Wolf, chief economics commentator at the Financial Times. “Overall, the economically free countries are, with a few small exceptions, also leading democracies,” he says.

At its core, capitalism is an economic system characterized by private initiative and ownership of the means of production, fair competition, and the pursuit of profit. Free-market capitalism emphasizes limited, but appropriate, government intervention. When capitalism is optimized, individuals have the right both domestically and internationally to buy, sell, invest, start businesses, lend money, borrow money and exchange currencies. These are freedoms cherished by liberal democratic governments.

Democracy, on the other hand, may be simply defined as a system of government where power is vested in the people who exercise their authority either directly or through elected representatives. The principles of majority rule and protection of individual rights and freedoms are prominent. Liberal democracies, which are the most commonly favored type of democracy because they tend to be very stable, go further by providing additional emphasis on the rule of law, minority rights, civil liberties and a sound system of checks and balances. Examples of liberal democracies include the United States, Canada, Japan, Australia, New Zealand, and most European countries.

Capitalism combined with democracy has created the highest quality of life ever achieved across the globe. Essential components of its not-so-secret recipe are the extensive freedoms afforded to individuals to make choices that are protected by the rule of law.

Debilitating democracy will debilitate capitalism

Liberal democratic countries with sound systems of checks and balances are designed to prevent any one leader or party from permanently imposing its will or policies on others. This balance is part of an important formula that enables constant change, some good, some bad, but always allowing for self-correction through elections.

If democratic values are curtailed or eliminated by extreme-leaning governments, freedoms afforded to individuals will also be curtailed. In turn, high-performing capitalism, which requires freedom of choice, will suffer. As expressed by Michael Novak, author of dozens of books on the philosophy and theology of culture, checks and balances are as important to the political order as competition is to the economic order. Capitalism is not just a set of economic arrangements, but depends on core values which are also essential to liberal democracy:

Democratic capitalism is not a “free enterprise system” alone. It cannot thrive apart from the moral culture that nourishes the virtues and values on which its existence depends. It cannot thrive apart from a democratic polity committed … to limited government.

It is not, in fact, possible for capitalism to be successfully implemented for very long without a robust democracy. As an example, we can take China. The People’s Republic does not have a system of checks and balances, does not promote competition among its vast state enterprises, limits the action of its markets and restrains the independence of its entrepreneurs. Despite having impressive economic statistics on paper, China’s brand of one-party state-controlled capitalism is undergoing deep-seated difficulties and is not likely to survive “as-is” in the long run.

History demonstrates that authoritarian leaders typically dictate all economic policies, pick winners and losers in business and industry, and disrupt or decimate markets by effectively taking decisions once made by millions of independent buyers, sellers and investors and placing them in the hands of a few individuals. This is a pattern that played out in the failed Soviet Union and which continues in present-day Russia or even China, governments that, despite partial liberalization, continue to a large degree to engage in central planning.

History also demonstrates that the tenure of authoritarian leaders typically does not end well. Why? To borrow a phrase from Lord John Acton, a member of British Parliament in the 1860s, “absolute power corrupts absolutely.” Authoritarian leaders rarely refrain for long from privileging themselves and their favorites over the public at large. The result: public support vanishes once the people realize that their interests are not served and their freedoms are curtailed.

“If authoritarianism of some kind were to replace liberal democracy, competitive market capitalism would be unlikely to survive,” said Martin Wolf. The world’s democracies must prevent this. It’s essential that we strive to address and rectify the critical economic, social and cultural issues of our time. Global support for the middle ground, not the extreme left or right, will save our democracies as well as our capitalist systems.

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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