Does Capitalism Really Need Democracy?
In the west, we tend to think that capitalism and democracy go together, and that the people can always decide what is best for their country. And for a long time, this seemed to be true. Democratic countries flourished, while dictatorships were too often characterised by famines and oppression of the people. However, it is now the 21st century, and many people have come to the realization that the system may be failing them. Is it time for us to reconsider our political and economic systems? For the purposes of this project, we will mostly be considering the economy of the United States of America.
How Capitalism is Failing the Majority of the Population
Global inequality has been rising for the past two centuries, and even today, the share of the nation’s income attributed to the top 1% of the population has risen almost everywhere since the first data in 1980. The most striking difference is within the United States, where the top 1% income share went from 11% in 1980 to over 20% in 2017.There are many reasons for this.
Due to globalization, we have seen global monopolies emerge that have not been possible before. These new ‘winner-takes-all markets’ have meant a drastic increase in companies’ profit margins, and near-zero marginal costs for platform networks (eg Facebook). Such state of events makes it nearly impossible for any competition to enter the market, with the government unable or unwilling to change the situation (for reasons we will discuss later). For the first time, firms are exiting the market at a faster rate than new firms are entering it. This reduction in market competition means that global firms can manipulate their workers’ wages, often meaning they have to work in extremely poor conditions for the maximisation of profit and increase in wages of the senior managers. In the age where we have seen appalling working conditions in sweatshops in South-East Asia, where Apple has admitted to using child labour, and where manual workers in Bangladesh are often paid less than $2.00 a day for 14-hour workdays, we have also seen the ratio of the average pay of a chief executive to an average worker in the UK rise from 48-to-1 in 1998 to 129-to-one in 2016 and in the US from 42-to-1 in 1980 to 347-to-1 in 2017, and the share of companies’ income received by workers dropped from 65% in 1974 to 57% in 2017. People argue that monopolies are formed due to certain companies being better than the competition, and monopolies can be beneficial if these companies can concentrate on improving their products instead of competing on the market. Whilst this is true, there has been very little growth in productivity to show for it, and far more often we have seen these companies use their market dominance for lowering wages and exploitation of their workers. The stagnant wages in the USA are covered by its 2-3% real annual GDP growth. But what this doesn’t tell is that almost all of this growth has fallen into the hands of the rich, whilst the real median income for men without a college degree have fallen for the past half a century.
How Capitalism is Eating into Democracy, and Why That is a Problem
In the first presidential contest after the Citizens United decision, which removed constraints on corporate political spending, 84 percent of Americans agreed that corporate political spending drowns out the voices of average Americans, and 83 percent believed that corporations and corporate CEOs have too much political power and influence. And there is evidence to show that they are correct. In 2010, Citizens United allowed corporate money to support or attack candidates prior to elections, influencing elections, whilst the political opinions of the corporation often have no correlation with the opinion of the citizens. In 2018, corporations spent about $3.4 billion a year on reported lobbying expenditures— far more than the $2.17 billion that are spent to fund the House ($1.22 billion) and Senate ($948 million). For every dollar spent on lobbying by labour unions and public-interest groups, corporations spend over $34. But it hasn’t always been like this.
In 1976, for the first time, the US Supreme Court ruled that the money wealthy people used to influence legislators was ‘free speech’ and was hence constitutionally protected. This logic was further extended to corporations in 1978. And from the time of Ronald Reagan, the corporate power over the US government has steadily increased, to the point where the majority of the people have almost no say in the government’s decisions.
The recent increase in socioeconomic inequality has greatly affected political participation of the people. Many poorer people have started to believe that their voices are not heard, which is reflected in their turnout in the elections. In the USA, for the 2012 presidential elections, turnout of families with household incomes below $10,000 was only 47%, while turnout for those with incomes of $150,000 or above had a turnout of 80%. Furthermore, on average, people who don’t turn out to vote are more liberal than those who do. They are more likely to support free healthcare, higher taxes for the rich, and increased funding for schools. However, as these opinions are never counted in elections, none of these issues have been properly addressed. Many politicians adjust their policies to fit the richer parts of the population, with higher turnout, and the socioeconomic divide keeps increasing.
In his book, senator Whitehouse stated that the Supreme Court’s conservative majority has “obediently repaid the corporate powers by changing the basic operating systems of our democracy in ways that consistently give big corporate powers even more power in our process of government, rewiring our democracy to corporate advantage.” This manifests itself in a number of ways. In 2014, a study by Princeton’s Martin Gilens and Northwestern’s Benjamin I Page found that, in terms of passing and signing legislations, the opinions of the bottom 90% of US citizens by income were almost completely ignored, whilst the economic elite’s (top 10% in income) preferences were used very frequently. In fact, as Gilens and Page themselves wrote for the Washington Post, the percentage of affluent Americans wanting a policy change and the percentage chance of the policy being adopted are directly correlated, which should not be the case for just a select 10% of the population in a liberal democracy. An even more surprising conclusion of the study was that “When a policy is strongly opposed by the affluent (less than 25 percent support) but not strongly opposed by the middle-class, that policy is adopted only 4 percent of the time. But when a policy is strongly opposed by the middle-class but not by the affluent, the policy is adopted 40 percent of the time.” In fact, contrary to basic democratic principles, strong support (>75% in favour) of the affluent part of the population is associated with a 25% increase in the probability of a policy being adopted, whilst a strong support from the middle class is actually associated with a small decrease in a likelihood of a policy being adopted (of around 5%). That means that if the policy outcome were to be chosen randomly, it would be more likely to be in the interests of the average person than by the process of the ‘democratic’ government.
An example of the government making laws purely to benefit corporations and the wealthy at the expense of the poorer Americans was the Medicare Modernization Act of 2003. This act banned US Medicare from negotiating prices for medical drugs, instead making it pay full retail prices. This act made tens of billions of dollars for pharmaceutical companies, whilst prices for these drugs and medical insurance sky-rocketed, leading to deaths of countless Americans. Even though 88% of voters agree that Medicare should be able to negotiate prices for these drugs, the drugs industry sponsors many of the federal politicians, and so the politicians return the favour by passing such legislations.
Earlier, I have mentioned the subject of monopolies, or in some cases oligopolies, where a small handful of companies controls the market. In the past, we have seen governments break up some of the largest companies in the US, such as American Tobacco, and American Telephone and Telegraph (AT&T). However, Google today has a larger market share of the search engine market than the Standard Oil Company, perhaps the most infamous case of a monopoly in US history, ever did. Even for its third violation of EU Antitrust Laws in 2019, Google was only fined $1.7 billion, just 1% of the company’s revenue in the same period. In the US, however, it has not been charged with anticompetitive practices, though there is an investigation currently underway. Due to many donations from large companies, such as Facebook, Amazon, Google etc, the Supreme Court has been far more lenient in its judgement. Even the obvious anti-competitive practices, such as Google’s contract clauses that prevented websites from placing other companies’ ads, which have been recognised under other jurisdictions, such as the EU, and Amazon’s control on the price of products and logistic partners, have repeatedly been ignored by the US judiciary. This creates a non-competitive market, where several big companies prevent any competition from entering the market and leads to the stagnation of improvement in productivity (as discussed previously).
This makes us ask the question: ‘Is democracy really the best system for capitalism?’
Why there is an alternative to democracy
While there are economic models that have been more successful than the one described previously, such as the Nordic model, with high-tax welfare states, the main focus will be a different political model- authoritarianism. Although there are still many authoritarian governments that oppress their people and prevent free trade, we will specifically discuss free-market authoritarian governments.
As Wolfgang Merkel put it, ‘Capitalism and democracy follow different logics: unequally distributed property rights on the one hand, equal civic and political rights on the other; profit-oriented trade within capitalism in contrast to the search for the common good within democracy; debate, compromise and majority decision-making within democratic politics versus hierarchical decision-making by managers and capital owners. Capitalism is not democratic, democracy not capitalist.’ Capitalism doesn’t seek the common good. Capitalism is about each individual making us much profit as they can with whatever capital they have. There is no greater good, no equality which is promised by democracy (at least in terms of political power). In fact, in the way it has very few powerful people making decisions without, necessarily, the consent of other people involved, it is far more similar in its ideology to an authoritarian government. And there have been very successful cases of how the two ideologies can combine.
According to the 2020 Index of Economic Freedom, the two countries with the most economic freedom are not liberal democracies. The first is Singapore, at its independence from the British Empire in 1965, a country that was severely underdeveloped, with no natural resources, and a GDP per capita of $516 in current US$. In 2018, its GDP per capita (PPP) ranked second in the world at $98,000, behind only Luxembourg, with annual real GDP growth above 3%. Its inequality has also been falling since 2007, which is the opposite to the trend in most developed countries. Due to the very little government intervention and its free markets, its inequality is still very high compared to most countries. However, its Gini index value is now below that of the United States. In fact, in 2019, whilst income for most deciles by income rose by over 4%, the income for the top 10% rose by just 0.4%, showing the strides the country is making towards equality. This rapid growth can be largely attributed to the time of the dictator Lee Kwan Yu from 1959 to 1990. Through their encouragement of business development, not least by their large amount of financial support to start-up businesses, and complete economic freedom with very low tariffs, liberal migration laws, and little government intervention, they have become a major international trade hub, and a factory for new businesses. They have also focused on healthcare and education as a means of future development. Add to that a government that has ranked as the 4th least corrupt government, and you have a system that is set to prosper for years to come.
The second is Hong Kong, that tells largely the same story. Minimum economic regulation, non-corrupt government and complete encouragement of free trade has led to an endless amount of business development. Just 50 years ago, its GDP per capita was $960 adjusted for inflation, with few natural resources, and very little development. Today, it’s over $48,000, and the real median household income is still growing.
Although these are small countries, both with populations of just over 5,000,000, and many of the policies implemented would not function in countries the size of the USA, there are definite advantages of having a free-market dictatorship. We have seen China emerge as one of the fastest-growing economies in the world since it has adopted capitalism, though it still has a long way to go until its economy is free enough to encourage further business development, as well as removing corruption in its government.
If there are no elections, or at least not meaningful ones, the government does not need funding from private corporations for its campaigns. This severely limits the political power corporations can have. As a result, free-market-centred governments can make decisions that are better for the economy and the people as a whole, not only for major corporations.
There are also other problems with democracy; for example, that people vote for what is best for them, not necessarily what is best for their country. For example, retired people will often simply vote for the candidates that would increase their pensions. What it would take for a country to distribute wealth equally would be for voters to elect candidates who are willing to do that. However, since voters always act in their own self-interest, this doesn’t usually happen.
But there is a negative side to authoritarian countries. The government often violates their freedom of expression, rights to privacy, and suppresses any political opposition. There is also a direct link between income inequality and low happiness levels. Although these countries are moving towards higher equality, the way their economies are set up causes very high inequality levels compared to most countries. As a result, whilst being some of the richest and most economically free countries in the world, according to the World Happiness Report, Singapore’s and Hong Kong’s citizens rank 31st and 78th respectively out of 156 countries, both far below the USA at 18th.
Conclusion
I still don’t believe that liberal democracy is beyond saving in the US. What is required is a government and a Supreme Court that are willing to take power away from corporations, and back to the people, perhaps even having to make amendments in the constitution for this. This process would take a long time and, as things stand, this is not possible since it would be very hard for such candidates to get elected, and it is always tempting for politicians to take money from these corporations. As a result, we are currently often seeing free-market dictatorships outperform free-market democracies, and the notion that democracy is the best system for successful free markets is being challenged more and more frequently.