Reconciling Capitalism and Democracy
Volumes have been written supporting or opposing the conceptual merit of both Capitalism and democracy. This article is not one of those; we can take the positive value of both Capitalism and democracy as a starting point. Instead, what this article will focus on is this: first, how Capitalism, as manifested in the free market, affording its members the universal and unconditional rights to labor, property, contract, and peaceful interaction, interacts with modern democracy; second, whether a fully free market is or can be consistent with a fully democratic government; and third, if and how both Capitalism and democracy can be pursued at once. Ideally, the assumption made in this article is the following: The two concepts of the free market and the democratic government should not only coexist with but also actively reinforce one another.
Unfortunately, in the modern world, these two principles of Capitalism and democracy seem to be diametrically opposed to each other. Over time, most democratic governments have heavily restricted or otherwise aggressively involved themselves in a great number of industries. The history of most democracies has been a slow slide towards corporatism at best and Socialism at worst.
The first step tends to be to guarantee economic “security” to both the consumer and the producer through subsidies, tariffs, anti-trust activism, and consumer protections (the Economic Security Society). This is most evident in industries such as agriculture or banking, although most modern industries have been provided some form of “protection” against the natural forces of the market. The next step is to view these industries, already regulated and influenced by government policies, as either public amenities or vices that should only exist under the careful tutelage of a government third party (the Amenity-Vice Society). In this stage, actions such as price controls, heavy taxation, comprehensive regulation, and/or vouchers are used to change the previously free market into corporatism, making industry unable to function independent of the now artificial supply and demand system that has been established for it by government actions. Examples are the American health care system, alcohol and cigarette companies and the food industry, none of which could function the way they do today without the artificial market that has been created by the government. Finally, the government gives this artificial market, now viewed almost exclusively as a public amenity rather than a competitive industry, a positive or negative value by the government (the Socialist Society). If it is viewed as a vice, then the government makes its activities illegal, banning substances such as alcohol and drugs. However, if the government views this industry as a virtue or a positive right, the industry is first nationalized and then all competitors to the government program are banned. Examples are clear in European health care, the Bolivian and Venezuelan oil industries, and the Icelandic banking industry.
The pessimistic view says this slide toward first corporatism and then Socialism is inevitable in a democracy because candidates are constantly attempting to gain popularity among voters. One of the easiest ways to do this is to promise voters desirable results with a lack of personal cost. A mix of contempt for others’ different moralities and a desire for “freedom” from the burdens of reality tends to lead a majority to support policies tending toward growing economic authoritarianism. This occurs first by shielding people from the economic and personal consequences of their actions and values through the Economic Security Society. Having stripped voters of responsibility for the consequences of their actions, politicians then promise to take away the responsibility for the taking of actions as well, creating the Amenity-Vice Society. Finally, the Socialist Society takes away any possible residual responsibility, giving people no choice at all (or, in stark terms, the simple choice to do either what they are told by the expansive laws and the state economy or to be imprisoned). On the politicians’ part, it is not that they fail to anticipate the sociological or economic consequences of their actions, it is that these concepts do not even surface in their thought process. Any potential hesitancy among the politicians is offset by the calculation that, if they do not support these policies, they will be replaced by someone a little more radical than them, so they might as well compromise. From their perspective, there is nothing to be gained from remaining reluctant to embrace the slide. In this analysis, politicians in a democracy will act only as gauges of public opinion; they can never quite leave the shadow of the public’s desire.
The slippery slope is clear in the histories and economies of the most developed nations. In Britain, the promises of the Tories to provide industrial safety with tariffs such as the Corn Laws and protection for laborers in Benjamin Disraeli’s One-Nation Conservatism and David Lloyd George’s New Liberalism did nothing to stop the growing public interventionism in the economy. In spite of widespread fear, the Labour Party did not represent much of a threat until New Liberalism and One-Nation Conservatism started advocating in favor of some kind of Welfare State. As late as 1910, Labour only received 6 percent of the vote; it only gained widespread support after Lloyd George’s reforms changed the discourse along which politics were framed. By 1918, Labour received 20% of the vote, and by 1922, 30%. Compromise attempts from Conservatives and Liberals did not stop Labour’s rapid growth. Giving Labour free reign in leading domestic policy during World War II certainly did not reduce the support for Labour; no, it merely meant Labour promised more and won more. Since then, British politics have constantly moved left; at this point, even the most right-wing politicians in Britain do not dare question the nationalized health care service, something that would have seemed like claptrap to its unintentional progenitors from the ranks of One-Nation Conservatism and New Liberalism.
In America, this progression towards a more Socialist system has been even more stark. This began with the Whig Party’s American System, which presented the creation of an Economic Security Society of high tariffs and subsidies, during the Gilded Age (especially during the 1880s to early 1900s, when the Republicans ran exclusively on policies promising security). Those economic security policies eventually led to the opposition Democratic Party being overtaken by supporters of the Amenity-Vice Society, starting with William Jennings Bryan and fully coming to fruition with Presidents Woodrow Wilson and Franklin Roosevelt.
Since then, the view of the markets as being filled with either amenities or vices that must have their supply and demand completely controlled by the central government has become nearly hegemonic in American politics. Medicare, Medicaid, and food stamps are on the one hand the manifestation of a market viewed as an amenity to be guaranteed by the government to the poor, while, on the other hand, taxes such as those on cigarettes and alcohol attempt to reduce the demand for these products, as they are viewed as “vices” and thus as an impulse to be reduced or an enemy to be defeated.
Once operating under the Amenity-Vice Society, it is extremely easy to fall, purposely or accidentally, into the Socialist Society. Projects such as Prohibition, the War on Drugs, and the recent ban on vaping, for instance, would have seemed unthinkable in the historical system of the free market or the Economic Security Economy. In a system with public vices, however, banning products is not only a possibility but a strong temptation. After all, once the argument is accepted that the supply and demand of a vice can and should be controlled by the government, there is no reason for the government not to declare war on all demand by banning the product entirely.
Nationalization, too, has increased dramatically. In areas such as retirement pensions, education, the postal service, transportation methods such as railroads, and increasingly areas such as health care, the once impossible-sounding idea of “creeping Socialism” seems right on the horizon. According to a poll by Axios, for example, nearly 50% of Generation Z Americans believe in a Socialist economy, up from only 37% who believed the same thing 20 years ago. Historical predictions based on a pendulum theory seem to be falling through, as young members of Generation Z turn out to have even more pro-nationalization and anti-market views than their predecessors in the Millennial generation. The Idea of self-correcting politics, in which people grow economically more right-wing as they grow older, also does not seem to be coming to fruition: according to a poll by the Pew Research Center, 30-44 year olds turn out to be strongly left-wing (voting 58% for Democratic candidates and only 39% for Republicans), even though they are middle-aged, the years when voters historically have tended to be most right-wing.
And resistance to this slide toward Socialism has not had many long-term positive effects. At most, all the free marketeers seem to be able to hope for is a retreat from the Socialist Society into the Amenity-Vice Society. Examples are striking in the alcohol industry, the airplane industry and, most recently, the cannabis industry. In all of these, privatization has merely meant heavily controlled, taxed and regulated industries with the pretense of a free market. Actions to reverse the trend toward increased state control tend to be either a piecemeal replacement (rather than a restoration of a real free market) or easily repealed.
Many advocates for either the free market or democracy have given up on the foundational idea of a liberal democracy. Recent ideological constructs such as “Democratic Socialism” on the left and the “Dark Enlightenment” on the right are attempting to do away with either Capitalism or democracy, respectively. Indeed, these two concepts are under more pressure now than at any recent time in history. In light of this trend, many advocates for either the free market or democracy have simply given up on the very idea of a liberal democracy. For instance, eminent economist Joseph Schumpeter said, “The Capitalist process shapes things and souls for Socialism.” The more recent thinkers in the so-called Dark Enlightenment hold similar views. Fringe economist and gadfly Hans-Hermann Hoppe wrote a book, Democracy: The God That Failed, about this particular subject, decrying democracy as a system that will always bring about Socialism and that should thus be replaced. On the other side of the issue, the democratic Socialism movement has attempted to sever relations with the free market altogether. Even moderate members such as presidential candidate Pete Buttigieg have opposed the free market, zoomorphizing it into a beast that must be somehow tamed so that the true values of democracy can be felt.
All this is to say that ideological pessimism is of course very tempting. And yet, it must be resisted. Rather than compromise – or at the most extreme rid ourselves of – the one or the other, our intention should instead be to find a way to reverse the trend towards increased economic authoritarianism. For this effort, we must look at how two countries, Israel and Sweden, have managed to buck the trend and emerge as democratic societies stably moving toward economic freedom.
Israel:
In the first 30 years of its existence, Israel was one of the most left-wing nations in the non-Communist world. Led by the left-wing political party Mapai, the Amenity-Vice Society was created in an orthodox manner, with housing subsidies, a welfare state, and the guarantee of many labor rights such as the minimum wage and collective bargaining. The slippery slope, even at this early stage, moved for a while in the same way that it was expected to: in spite of Mapai’s original promise never to work with Mapam, the Israeli Marxist party, the two merged into the Alignment in the early 1970s, and with that new alliance, healthcare was partially nationalized. The slippery slope seemed to be moving how it was expected to: from Amenity-Vice to Socialism.
“Ladies and gentlemen, a revolution!” proclaimed TV anchor Haim Yavin announcing the results of the 1977 election. To the collective shock of everyone, the left, which had led consecutive governments following landslide elections for almost 30 years, fell. Since then, politics in Israel have only moved further right. The more recent left-wing governments, such as Yitzhak Rabin’s in the 1990s, have not attempted significant leftist policies but instead have moved towards the center. During Rabin’s government, the nationalization of healthcare was the last cry of the Socialist Society under an administration that mostly attempted to privatize and deregulate. Next, current prime minister Benjamin Netanyahu’s term as finance minister in the early 2000s was marked by massive cuts to public industry, regulations, and other Amenity-Vice programs. In recent years, the left in Israel has nearly ceased to exist altogether, being replaced by a group of centrist parties, none of which desire to promote any economic authoritarianism (indeed, they tend to instead to criticize the right-wing government for not being right-wing enough on economic policy). Not only has the “amenity” part of the traditional model been rebuked, but so has the very idea of vice. The recent decriminalization and (if we are to believe Netanyahu) soon-to-be legalization of cannabis are just one of many reforms, all encompassed by a general resurgence of secularism, that illustrate a society rapidly rejecting the idea of government-opposed vices.
In fact, this has not been a controversial group of policy changes. Left-wing parties in Israel only received 9% of the popular vote in recent elections, demonstrating the complete rejection of the traditional Amenity-Vice Society. Even more telling are the demographics of who votes for the right. According to a study by the Israeli Demographic Institute, 64% of young people in Israel vote for right-wing parties, compared to only 47% of their older compatriots. In the April 2019 election, the cities and areas that voted for the right-wing were not the wealthy ones but the working class areas, in stark contrast to most democracies.
The question we must then ask is how the Israeli free marketeers have managed to so stably flip the usual governmental progression toward economic authoritarianism and how that experience can be replicated in other nations. The most obvious answer – and the one usually given – is the Israeli draft. This argument asserts that young people are right-wing because they are thrust into the military and learn right-wing values there. However, this argument is unconvincing. In another similar country with a draft, the Republic of China, young people apparently do not learn right-wing values: over 70% of voters in the 2016 election voted for the left-wing candidate, Tsai-Ling Wen, according to exit polls.
Instead, the true answer to our inquiry lies in the Israeli Right’s recent inclusiveness toward immigrants. Heavy lobbying for Russian immigration – first in the 1990s and more recently after the Euromaidan unrest in Ukraine, led to immigration of capitalistic Russians and other former Soviet bloc citizens angry with how their socialistic home countries treated them. Russian immigrants comprise 12% of the Israeli electorate, and over 80% of them voted for right-wing parties in the recent elections, according to exit polls by the Israel Times and Professor Ze’ev Hanin. This is just one component of the right-wing trend that has been very noticeable among Israeli immigrants. Immigration and minority-based right-wing parties are very common in Israel: Shas was created to accommodate right-wing Sephardic and Mizrahi Orthodox Jews, United Torah Judaism was made for right-wing Eastern European Orthodox Jews, the New Right has its niche mostly among right-wing Anglo-Israeli secular Jews and, most notably, Yisrael Beiteinu pitches itself almost exclusively to right-wing Russian secular Jews.
So what is clear is not that Israel has created some kind of magical remedy for the slide towards economic authoritarianism but instead that it has managed to forestall it by injecting its society with immigrants who are more right-wing, manifest in the fact that the increase in rightism in Israel, which was most pronounced in the 1990s, was occurring at exactly the same point when immigration spiked in Israel to over 70,000 people per year. From this vantage point, the earlier demographics make more sense. Of course Israeli ethnic minorities and the poor are more right-wing: they tend to be immigrants or children of immigrants. And the reason Israeli youth are more right-wing is simply because this major shift from left to right happened in the 1990s, before they were born, so the discourse in Israel during their youth was and is simply more pro-free market than the country’s policies themselves.
However, this immigration-based experience seems difficult – and perhaps impossible – to generalize beyond the particular example of Israel. Israel’s policy of Aliyah attracts immigrants who are nationalistic or religious, and both traits are strongly correlated to a belief in the free market. An Aliyah-like policy is not something that other countries can easily copy, at least not with the same level of success. However, it can at least be used as the basis for imperfect, short-term policy. A possible strategy suggested by the Israeli experience would be to encourage heavy immigration from nations with more right-wing, individualistic, or pro-free market societies or cultures. An example of this closer to home is Florida’s influx of Cuban refugees, most of whom are intensely individualistic and have moved the state toward becoming quite a bit more right-wing than it would otherwise be.
However, this targeted immigration-based approach is neither fully sustainable nor fully desirable as a fix. One cannot treat a nation like an anemic patient, injecting more and more rightist immigrants, for very long. It may be advisable as a good policy to push a short-term trend toward the free market, but not as a way sufficient to flip the entire system and create a long-term economically free society. No, for that, we must instead look to Sweden.
Sweden:
With the exception of a largely incompetent centrist cabinet in the late 1970s, for over 50 years between 1936 and 1990, Sweden was led by a political machine pursuing economic authoritarianism. At first, until 1969, the government, led by Per Hansson and Tage Erlander, focused on policies of an Amenity-Vice Society, attempting to avoid nationalization while making the market an organ of the government’s wishes. The Swedish term “Funktionssocialism” involved regulating how private markets function and which markets were easy or difficult for citizens to gain access to. A combination of heavy subsidies, voucher programs and regulations made Sweden a society in which the market was, by the Swedish government’s own description, not independent but merely an organ of the state. Because of this, the Swedish government openly decided which markets were to be amenities provided freely to citizens or vices that the government would make as difficult to purchase as possible.
However, as we have seen, the system of Amenity-Vice is quite fickle and constantly open to further shifts toward unrestrained Socialism. In this case, the particular threat was Prime Minister Olof Palme, a strange figure with sympathies toward Communist revolutionaries and a wish to partially nationalize all industry in Sweden under a variety of government-affiliated labor unions. Forming coalitions with the Swedish Communist Party, Palme’s party redistributed, nationalized, and all-around rejected the Amenity-Vice system in favor of a more socialistic one. Soon, it was considered right-wing to support and defend Funktionssocialism, and the aforementioned short-lived centrist coalition did not attempt to privatize or grow the free market but tried simply to keep the Palme government from embarking on further nationalization. It was only a major economic crash in the 1990s that stopped the Swedish economy from sliding even further into Socialism.
While the Swedish economy had been extremely tumultuous for the previous few decades, the crash of the 1990s was far more severe than anything prior. GDP dropped by 5 percent, and unemployment was around 11 percent for five years. (In comparison, during the Great Recession of 2007-2009, U.S. GDP only dropped by 2 percent, and even during the absolute worst months, unemployment never reached 10 percent.) This major crash, understandably, brought a victory for the Swedish free marketeers. While most of their reforms were subsequently repealed or their effects mitigated, there was one longstanding reform that survived: the creation of a systemic school voucher system for secondary schools, one of only two such systems (in addition to Chile) in the modern world. As we will argue below, it was this voucher system that led to the unique shift in generational voting patterns in Sweden’s recent history.
After failing to fix the economic crisis for three years, this free-market government lost power. Later governments retreated back into Funktionssocialism, and following a variety of austerity programs, the crisis soon ended. The free marketeers, after losing another election by a landslide in 2002 in spite of continued high unemployment, seemed to have returned to their traditional position as a marginal opposition. Surprisingly, however, in 2006, the free marketeers, under the moniker of “The Alliance,” won their first majority government, and in 2010 they won re-election for the first time since 1928. During both these Alliance governments, heavy privatizations and cuts in the tax rate effectively ended the era of Funktionssocialism, leading the Swedes into an economy more similar to that of the Economic Security Society than the Socialist one. Even in the two more recent left-wing coalitions, the leftist parties have not managed to win a majority government and have thus been forced to make major concessions. In fact, the current Swedish “left-wing” government has agreed to reduce taxes, cut spending and loosen labor regulations, in a clear rejection of the once dominant Amenity-Value Society.
Most notably, the surge in the right-wing in Sweden has not arisen among the elderly or middle-aged, as in many other European nations, but among the young. According to exit polls by Sweden Television (SVT), in the most recent 2018 election, the ratio between the Swedish left and right was 41/40, while among those between 18 and 21, it was 40/46. Urban youths, in fact, were the most right-wing voting bloc, the opposite of the situation in most of the rest of the West.
The conventional explanation of this phenomenon is the belief that (because of a mix of the pendulum theory and the idea that the Amenity-Value Society is unsustainable), youths all over Europe – and especially in the Nordic countries – have moved towards the right. However, data from Norway show this to be incorrect. Norway’s last election in 2017 was extremely close: the ratio of left-wing to right-wing voters was around 49/49 (1:1). However, according to exit polls by Statistics Norway, the ratio of left-to-right among 18-29 year-olds was 52/39 (4:3). And besides, if anything, young Swedes should be more left-wing than their elders, as they have not been exposed to the possible failures of the Amenity-Value Society demonstrated in the 1990s recession.
The next possible explanation for the increase in right-wing sentiment among young Swedes involves populism: perhaps Swedish youths are not conventionally right-wing, but support the anti-immigration, Eurosceptic parties and thereby still increase right-wing turnout and help the free marketeers that way. However, this explanation is bunk. In reality, the young do not turn out to support the populists any more than the average Swede; if anything, the young are less supportive. In Sweden, whereas 17.5% of voters supported the populist Sweden Democrats, only 12% of young people did the same.
So, the Swedish situation is clearly a special case, and the reason for this special case can be isolated historically in the country’s unique school voucher system. Swedish youths (those who graduated in the past ten years, as the utilization of school vouchers for private schools is becoming more common) are right-wing because they are the only ones to have been educated under the voucher system, which took a while to be not just enacted in theory but also in practice (due to the natural delay in the full implementation of the policy). Similarly, Swedish urbanites are more right-wing because private schools are more likely to have been built in cities, which have more available consumers (concentrated among members of the professional middle-class) than more rural areas.
Indeed, this education-based analysis of economic authoritarianism makes far more sense than the pessimistic perspective that predicts that democracy will always create socialism. In Britain, One-Nation Conservatism, New Liberalism, and the Labour Party did not thrive naturally, but only after education was guaranteed and nationalized in the Elementary Education Acts of 1870, 1880, and 1891. In the United States, education was made compulsory and free between 1900 and 1918, the same time period during which the American political discourse shifted from the Economic Security Society to the Amenity-Vice Society.
Analytically, too, centralized education makes sense as a root cause of economic authoritarianism. When the state is commissioning the textbooks and creating the curriculum, and when what is right and wrong not just in the hard sciences but also in the soft, subjective sciences is determined by the state, then what is taught will be not just acceptance but support for a more powerful state. In a democracy, the acceptance of the idea of a strong state leads to the inevitable creation of a strong state. The slippery slope toward economic authoritarianism is simply the result of the increasing acceptance of the state as the purveyor of morality.
The Economic Security Society arises once a majority of people believe that the state knows more about how to guarantee them a good life than they themselves do. The Amenity-Vice Society arises once that majority believe the state knows what is moral and immoral better than they do and they agree to give up their power over supply and demand. Finally, the Socialistic Society comes when the people completely give up to the state their ability to decide what is and isn’t valuable; it is the only rational endpoint of the previous two models. All of these sequential assertions are intrinsically supported by a public education system that instructs us how to live and what is good and bad.
However, a voucher system implies precisely the opposite, as students learn what they are told not by the central government but by a school chosen by their parents and through a free market. While this allows and even incentivizes niches that might not be completely Capitalistic, in all cases it frames knowledge as not a gift from an all-knowing government from above but instead as a choice to be made by each family, and as such, it returns at least a level of autonomy and individualistic epistemology to society.
And so, finally, we have found a way to stall and indeed to flip the slippery slope toward economic authoritarianism. In tandem, the Israeli and Swedish models are likely to work even better than either alone: importing believers in individualism, while only a short-term fix, can be used to establish a voucher system that can create and sustain a long-term free market. Or, if that is impractical, one can simply wait – as the Swedes did – until some kind of opportunity, usually an economic (or, in more recent years, a sociological) crisis presents itself, affording free marketeers at least a short-term opportunity to govern so they can establish the educational policies that will lead to the necessary long-term shift in epistemology.
And then, when the voting populace believe in the fundamental goodness of their own and each other’s ethical decisions and values, we can finally establish a truly liberal democracy.
