G| Democracy and Capitalism: Disequilibrium

An X-ray of the Evolution
of Globalization

Recognizing that Democracy and Capitalism are systems that have governed the behavior of humans and have impacted the relationship between societies this article will revisit systemic and rudimentary highlights of the above-mentioned systems. Democracy has an indirect effect on economic growth. For instance, greater civil liberties contribute to higher GDP and increased investment.  A democratic political system “potentially” can have positive effects on economic development, if and only if, people have full information and their environment and their behavior is rational.  The interlocking structure between democracy and capitalism is depicted in the following dictum that describes the relationship between “efficiency” and “equality”: “Democracy needs efficiency to put some rationality into equality and the marketplace needs equality to put some humanity into efficiency.”  Democracy and Capitalism are an interfacing and intertwining institutional structure that attempts to bring harmony to efficiency and equality which are inherently in conflict.  Equality is promoted by democracy and efficiency is promoted by capitalism.  So, a political system that is democratic must integrate the harmonious functioning of both seemingly antithetical pursuits, that is, democracy and capitalism and achieve a relative symbiotic optimum. The level of economic efficiency varies among economies, organizations or humans.  Such variability in efficiency creates different inequalities which must be managed judiciously.  This judicial task has been undertaken by the given country’s government whose expediencies must not be influenced by capitalist pursuit of efficiency maximization.  

Evolution of Contemporary
Capitalism in a Democracy

Theorists such as Max Weber who coined the term “protestant ethic” and described capitalism, suggested that hard work and frugality are essential to creating material wealth which gave credence to the concept of capitalism.  

However, the continuum of capitalism has different levels of adherence to it.  For instance, strict wealth accumulation is different than producing acceptable levels of comfortable living.  Wealth accumulation has increased at the expense of the functioning of Democracy.  The Congressional Budget Office of the U.S. Congress reports that wealth inequality has widened significantly between 1989 and 2019, "with the wealthiest 1% getting $29 trillion richer as the average working family saw only a negligible increase.”  "During the same 30-year period, the bottom half of Americans saw their share of the nation’s wealth drop from 4% to 2%.”  

The Austrian Joseph Schumpeter coined the term “creative destruction” which describes the tendency of entrepreneurship to speed up the demise of existing products by replacing them with newer better ones. Indeed, this is what we observe in studying the theory of Product Life Cycle (PLC).  That theory suggests that before a product enters its maturity stage other new product versions come in to replace the older one and contribute to its demise.  Critics might suggest that capitalism is directly responsible for such an event.  Schumpeter correctly identified it as “creative destruction.”  The supportive argument here is that entrepreneurship, which pursues product development, would perhaps, not exist if business organizations or people did not look to improve existing products and maximize revenues.  

Democracy mandates the people’s legal entitlement to participate in policy formulation with regards to the development of a capitalist economy or markets. Milton Friedman suggested that a free market and the development of Capitalist institutions are a necessary condition of political freedom.  Moreover, he said that economic freedom is correlated with political freedom.  

What is the current status?

It is well-established that capitalism needs and supports democracy and democracy needs and supports capitalism.  But, is the mutual support reciprocal?  If we observe the evolution of the international economy in the past 30 or so years we may resort to infer that the relationship between democracy and capitalism is in disequilibrium.  I will offer examples as evidence of the veracity of the above thesis:

• The evolution of neoliberalism or Hyper-Capitalism.

This is described as a fierce orientation toward lowering international trade barriers and protectionism, promoting unrestrained international competition, undermining national protective regulation.

• National market privatization.

This has as a goal the promotion of efficiency, which is a profit-oriented strategy.

• An unfettered Global financial sector.

The advantages include absence of regulatory interference, less stringent disclosure requirements and favorable tax status.  The implications for international business include: borrowing at a lower cost; more flexibility due to less regulation; more risk from currency fluctuations; and, more investment diversification (less systematic risk).

• Shareholders' preeminence over workers.

This is a subtle strategy by which to attract the workers into investing in the growth of companies and for profit.

• A growing imbalance between classes.

Income concentration is growing at the expense of income redistribution.  The richest are getting richer faster.  Income inequality in the U.S. has increased since 1980 and it is greater than in peer countries. (Pew Research Center)

Capitalism and Democracy are the outcome of composition of classes and class interests driven by political credos.  Capitalism and Democracy should be in balance and converging.  The new reality, however, is that Capitalism and Democracy diverge.  If Capitalism overwhelms Democracy it will result in unfettered wealth concentration which in turn will overpower political models and render national governments captive of capital.  On the other hand, if Democracy overwhelms Capitalism it will have adverse effects on Capitalism's efforts to maximize economic returns.  So, the choice is between Efficiency and Political demand.  That is, “economic interests” vs. “political interests.”  This means that Capitalism is not Democratic and, vice versa, Democracy is not Capitalist. These are the two sides to the same coin which are inseparable but antithetical.  A harmonious integration between the two would seemingly be Democratic Capitalism under which markets produce income resulting from a given level of Efficiency while the government redistributes income on the basis of Political demand.  

What role has Globalism played?

Globalism has inhibited the ability of democratic governments to govern, threatening Democracy to transform into Oligarchy which can become legitimate by general elections.  Globalism has accentuated and given rise to neoliberalism.  In the interim, institutional initiatives from WTO, IMF, Global corporations and other supranational organizations have supported and promoted the concept of Globalization.  Neoliberalism has transformed Democracy and has given birth to four distinct threats.  Those are:

• Asymmetric political participation.

The political process is dominated by wealthy segments of the society at the expense of lower classes characterized by poverty.

• Failure to forestall the rise in economic inequality.

The inability to stem the rise in economic inequality.

• The increasing leverage of global financialization upon national governments.

National governments are forced to accommodate global economic interests.

• Political decision-making powers have been transferred from national parliaments to corporate executives.

This gives credence to the new character of the global corporation known as “global capitalism.”  For instance, in 2016 TransCanada corporation sued the U.S. government for $15 billion, under the Chapter 11 of the NAFTA accord for protecting investors and their profits and for cancelling the U.S. Keystone XL pipeline.

NOTE: Global Capitalism was discussed in the author’s article:

“Global Capitalism: A Perspective of Convergence” International Review of Modern Sociology;

Vol. 20, No. 2 (Autumn 1990), pp. 239-251 (13 pages).

https://www.jstor.org/stable/41421569

The Anti-democratic
character of Globalization

Globalization has made Democracy subservient to Capitalism.  This is an aberration analogous to that of Marx who held that the Legal system should be subservient to the Economy.  Moreover, globalization has made it difficult for a marketer to market their product because it is difficult to stratify and/or use customization.  Globalization’s adverse effects upon Democracy are described below:

• Trade Liberalization.

It has not accounted for differences between developed economies (DC) and less developed economies (LDCs), producing asymmetries, resulting in inherent advantage of the DCs over the LDCs.  For instance, developed economies demand that the less developed economies open up their market even if they are not ready for it.  For instance, in the case of the EU, Germany demands that its superior products be sold in the Greek market, competing against Greek products that may be of lesser quality.

• Capital Liberalization.

Foreign Direct Investment (FDI) is mostly unregulated.  Capital inflows exert upward pressure on the local currency which directly hurts the country’s exports and market competitiveness.

• Trade Protectionism.

Developed countries (DCs) use subtle methods to protect their economies.  DCs use lower tariffs but they increase non-tariff barriers.

• Trade Agreements.

They increasingly reflect corporate interest first.  Such trade agreements give foreign corporations the right to sue a government.  

What next?
Where are we going from here?

It is self-evident that the above discussion confirms the imbalance between Democracy and Capitalism, with Democracy having become captive to Capitalism. Before we continue let’s establish the relative values of Democracy and Capitalism.  Democracy has an important indirect effect that contributes to growth. Democracy offers greater political stability, civil liberties, economic freedom and reduced social conflict.  Capitalism offers economic development and growth in the standard of living.  Capitalism focuses on Efficiency, Effectiveness and Technocratic development.  Democracy can optimally contribute to economic development, if and only if, it functions under a well-designed legislative and judicial system of laws.

The imbalance between Democracy and Capitalism has brought about a convergence of two antithetical systems.  I am talking about Capitalism and Socialism. Such convergence is progressive and it is imposed upon the two systems that are distinctly different.  The State of Affairs, in which this contemporary world exists, is that of degradation and corruption of governments and the political parties.  Global Capitalism is promoted by Corporate Capitalism.  What lies at the bottom of the entire concept of Capitalism is the human thirst for wealth and socioeconomic power. It follows that looking at the politicians for support is not the right target.  The right target, to mitigate the conflict of Capitalism and Democracy, is Economic Power Centers.  

How to defend Democracy
against a frenetic Capitalism

The Great Recession of 2008 and the increasing concentration of wealth directly point to the undisciplined behavior of global capitalism, fueled by neoliberalism.  There is a common agreement that Democracy, as difficult as it is to function, is the best-known political system.  In order to preserve this system, we need to promote and defend its survival.  The following fundamental and select strategies are thought to offer sustainable value to achieving its survival, recognizing that the pursuit of pure Democracy is asymptotic:

• Restructure the trade agreements so that transnational companies do not have an edge over national governments.

This would require changing select stipulations of the World Trade Organization (WTO) and Regional Trade Agreements (RTAs) such as the EU, the Trans-Pacific Partnership (TPP), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), etc.

• Eliminate the use of money or financing.

To abolish influence upon antidemocratic political positions and legislation.

• Promote government-led initiatives.

In order to redistribute GDP income among the poor or poorest segments of the population.

• Restrict asymmetric influence of wealthy political actors.

The said influence is practiced by socioeconomic actors upon government policy.

• Avoid politicization of public institutions

Public institutions should not be politicized or have political party affiliation.

• Protection against Oligarchic Democracy.

Oligarchic Democracy may be promoted as a democratic political system although it does not embrace the strict criteria of democracy.

• Government economic policy should be held in check.

The political system should allow for frequent referenda which are credible in ensuring that Democracy and Capitalism are in tolerable balance vis a vis their social and economic pursuits.

                                                                                                                                                                                                                                                                          Author: CGP .+.