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Market-capitalism and democracy are often perceived to be simultaneous notions that work together in

an economy. Yet whether the result in which these two concurrent concepts produces has a positive or negative

effect is often debatable. According to David Schweichart, market-capitalism is “a socioeconomic system

characterized by private means of production, where a bulk of economic activities is directed towards the

production of goods and services for sale on a free market. Prices are determined by demand and supply with

no government intervention as well as labour power being considered as a commodity.”1 To be a capitalist,

there must be private property, a free market and wage labour. Robert Dahl defines democracy as “a political

system that is completely responsive to all of its citizens.”2 Democracy operates on the basis of the principal

doctrine that majority rules. The relationship between market-capitalism and democracy is that the two notions

are interdependently linked to promote efficiency, equality and economic growth. This paper will critique the

extent to which the presence of both market capitalism and democracy will work to favour economic growths

and developments, efficient pricing and production, equality of both consumers and producers, and motivations

for research and innovations.

Efficiency

It is widely perceived that a democratic nation state is impossible if it is not linked with a market system.

If the political system of a certain nation is anything but democracy such as communism, the government will

ultimately put an end to the economy’s market system. It has always been a known fact that resources in this

world are scarce in contrast to the unlimited wants. In a market economy, resources are used in the most

efficient way as firms produce the exact amount that is demanded by the market. Hayek Friendrich in ‘The

Road to Serfdom’ comments on the relationship that if market capitalism is an economic system based on

competitions for free disposal over private property, it is critical to recognize that only within this economic

system is democracy possible. However, democracy, at times, has been proven to be intrinsically unstable.

David Schweickart, author of ‘Against Capitalism’ argues this point by stating that due to the potential

instability of a democratic society, it is inevitable that the society will seek stability by demanding the

democratic government to intervene and fix the “economy” and thus mitigate instability. Needless to say, the

1
Schkeiwart, David. Against Capitalism.
2
Dahl, Robert. On Democracy.
intervention of the government will take on the role of restoring stability, but at what cost? In a nonmarket

economy, where it is the responsibility of the government to allocate all scarce resources and means of

production, it is essential that the government composes a detailed and comprehensive central plan to outline

this responsibility. Government officials must then thoroughly carry out this plan of resource reallocation and

moreover, witness its enforcements upon the economy. Robert Dahl in ‘On Democracy” describes this process

to be a series of “prodigious tasks requiring staggering quantities of reliable information.” In reality, it is

plausible to conclude that no government has ever successfully carried out such a reallocation method. It would

require great amounts of incentives to motivate government officials to enforce such methods of reallocation

and planning such as rewards and bonuses, but in worse cases, bribery. With a centrally planned economy, the

government has full control over all of the economy’s scarce resources which may include capital, labour,

machinery, land, buildings, consumer goods, and dwellings. As a human, it is often believed that one will

pursue in one’s best interests and personal gains for this desire as it is a part of human nature. Thus, leaders and

government officials will be tempted to misuse these resources in which they have control over for personal

gains. Bribery and misuse of resources are common acts in many centrally planned economies such as China,

North Korea, and Cuba and a government which involves itself in these wrongdoings in the long run will

ultimately result in corruption. However, this defeats and contrasts the initial purpose of calling for the

intervention of the government to restore an economy’s stability. Thus, one can conclude that democratic

institutions have never been and should never be mixed with centrally planned governments because leaders

and officials of these governments are often antidemocratic for their purpose is the safeguarding of their own

power in the use of resources.

Pricing

An economy’s degree of efficiency also depends on how efficient the market prices its goods and

services. Market systems are able to establish these prices due to the fact that both consumer choices and

entrepreneurial choices contribute to deciding what to produce and what quality and with what inputs. In

addition, cost and price information are both universally available to both consumers and producers in a market
economy. Therefore, the existence of a centrally planned government would often distort these efficient market

prices due to the establishment of monopolies and implementation of government price fixing.

Equality

The basic definition of equality is that every individual possesses equal opportunities and rights.

Democracy is often argued to be essential in existence with market capitalism because they both work in

accordance to produce favourable situations such as the promotion of equality. The basis of a democratic

government relies on the notion of equality in that a democratic system must be one of egalitarian. Democracy

emphasizes equality more than any other political system because it is a government that is ruled by the people

and for the people. Every individual who has the right to vote will be able to express their opinions in a single

vote that holds an equal proportion in deciding a representative government that will make decisions on behalf

of the electorate. In a market economy, every individual has an equal opportunity at succeeding because no one

individual is has significant advantage over another in assumption that both has equal amounts of knowledge.

However, critics of the market economy, like Charles Lindblom from ‘The Market System’ argues that market

systems in fact produce inequality of both income and thus wealth due to the difference in “statuses” of jobs

such as entrepreneurs versus the working labourers. This inequality obstructs democracy which will then

ultimately destroy the mutual existence between market capitalism and democracy. In addition, although

political equality emphasizes the idea of each citizen possessing an equal vote in an election, the result is still

based on the doctrine of majority rules, which means that the minority group who did not get what they voted

for did not get an equal result as those from the majority group. The result essentially produces a situation

where there is a dictatorship by the majority. A counterargument against Lindblom is that in a market economy,

every individual has equal human rights and thus are available to equal opportunities to succeed and pursue in

any fashion in the economy. The wealth and income inequality is simply caused as a result of the different

strengths and weaknesses each individual has and how lucky and unlucky they are. It would be unjustifiable for

the economy to be blamed for this disparity. A communist country may provide equality in terms of wealth and

income but lacks equality in human rights since the wealth equality is ensured by the oppression of each

individual’s talents and abilities. As well, progressive taxation is implemented in most market systems by the
democratic government to minimize the income gap as much as possible in hopes to redistribute the society’s

wealth to the poor. Thus, democracy that exists in a market economy is able to guarantee the maximization of

political equality that emphasizes the five criteria of equality that is proposed by Robert Dahl: “voting equality,

effective participation, enlightened understanding, control of the agenda, and inclusion of all adult members in

collective decisions.”

Economic Growth/Development

A decentralized and market economy is able to create a society of independent citizens who are highly

favourable and capable of improving the nation’s development and maintenance of democratic institutions.

According to Robert Dahl, “market capitalism serves as a vehicle for a revolutionary transformation of society

and politics.” Market capitalism stimulates economic growth by allowing the potential world output to increase

yearly as firms of the market are all privately owned in which producers seek profit maximization and cost

minimization. This trend becomes favourable for a democratic political system in the long run because

economic growth helps to reduce social and political conflicts by an attempt to eliminate acute poverty and

improve living standards. However, in the case that there may be theorist of an economic conflict, an increase

in the amount of available resources produced as a result of growth will help settle the conflict easier since both

sides will mutually gain something. Thus, if there was no economic growth, economic conflicts would be, in the

language of game theory, zero-sum since cooperation becomes pointless. The production of more resources can

also be used by individuals and governments to ameliorate and promote education that can eventually foster a

literate and knowledgeable population.

Nonetheless, it is critical to note that economic growth is in fact different from economic development.

In a free and purely competitive capitalist economy, entrepreneurs and corporations often exploits the working

class because their ultimate goal is to increase their competitiveness in a market by minimizing their production

costs. Therefore, David Schweickart of ‘Against Capitalism’ describes a market economy to be a “free market

that masks a slave society in which a ruling class controls the means of production while a dominated class does

the work.” Furthermore, recent trends of globalization has led this act of exploitation of the working class into

other countries that may offer an even lower working wage due to the lack of development and abundance of
labour in that country. Nevertheless, with a democratic government, its intention is to serve that citizens in

which it represents. This means the government will not intervene in the market to determine what to produce,

how much to produce and whom to produce for. This gives private firms in the market a greater degree of

freedom and incentives to innovate and research in hopes of producing a new product that will maximize their

profits. The market system is able to motivate much of the population to become entrepreneurs because

entrepreneurship in a capitalist economy is not limited to a few in a hierarchical table of organization, as in a

planning system. There is no restricted amount of opportunities and no government interventions that dole out

these opportunities. This motivation to undertake massive research projects contributes greatly to an economy’s

growth. And as mentioned before, an educated citizenry as a result of economic growth will indeed cause the

country’s economic development to also increase because a more literate population will have better jobs with

higher incomes which increases their purchasing powers and ultimately increase their living standards.

In conclusion, market capitalism works to decentralize many economic decisions to relatively

independent individuals and private firms. This lessens the need for a powerful, even authoritative, government.

Since it is conventionally believed that a democratic nation state should be linked with a market system to

mutually work in favour of one and another, the paper had discussed how both market capitalism and

democracy have promoted efficiency, equality and economic growth. Efficient allocation of resources and

pricing methods can be achieved through the forces of demand and supply in a market to determine market’s

equilibrium prices also where resources should be allocated to maximize production of the most desirable goods

and services by the market. Equality can be achieved through the granting of equal opportunities to every

individual by a market economy and the political equality to have an equal vote in an election by a democratic

government. Economic growth can be stimulated through higher motivations to innovate and increase output

while economic development can be improved by a more educated and knowledgeable citizenry that will

increase living standards. No democratic nation state has ever attempted to eliminate its market system and the

historical connection between market-capitalism and democracy will rest on a state of mind by the nation’ s

citizens and their leaders.


DEMOCRACY AND MARKET-CAPITALISM:

AN EXAMINATION OF A MUTUAL RELATIONSHIP

Ellen Zhu (250450258)


October 26, 2007
Melissa Collimore
Political Science 020
Professors Charles Jones and Nigmendra Narain