July 3, 2023
Are Capitalism and Democracy Compatible?
America prides itself on being able to run two great systems — the economic system of Capitalism — and the political system of Democracy. Americans believe that these two great systems are highly compatible. If not, we may have to live with either strong Capitalism and weak democracy or strong Democracy with weak Capitalism.)
Thomas Piketty, the noted French economist on economic inequality, worried that strong Capitalism might weaken our democracy.
Market forces and capitalism by themselves aren’t sufficient to ensure the common good and to limit the concentration of wealth at levels that are compatible with democratic ideals.
Martin Wolf, the highly regarded financial commentator raised the same question in his new 2023 book, The Crisis of Democracy Capitalism. Wolf argues that market capitalism and liberal democracy must continually safeguard one another from the perils of autocracy, tyranny and civilizational decline.
Yanis Varoufakis, former Finance Minister of Greece, claimed in 2016 that “Capitalism is ‘Eating’ Our Democracy.” He asserted the current version of our Capitalism, financial Capitalism, is definitely stabbing our democracy.
Let’s look at two questions. Here is the first.
Does Capitalism Weaken Democracy?
The aim of Capitalism is to perform many needed economic activities that satisfy customers and produce profits. In this pursuit, capitalists want full freedom in determining their activities. They favor minimum regulations and minimum taxes, full property control, and minimum interference from government or labor unions.
Capitalism has unquestionably produced the highest level of economic growth and efficiency that the world has ever seen. Yet the growth came with a questionable sharing of the new wealth. The largest share of the economic gain went to those who invested, took risks, and who organized and executed wealth producing projects. The wealth of the rich grew year after year. Today the richest 0.1 percent of Americans owns 20 percent of the national wealth while the bottom 50% of Americans own just 1.3 percent.
Wage workers have not experienced much financial improvement since the 1980s. Many worker paychecks do not provide a livable income for a family of 4 or more. Fortunately, workers are able to acquire sufficient goods and services, thanks to the credit system. Workers borrow money to pay for their home, car, and many other needed goods and services. As a result, workers manage the appearance of having a livable income. However, they are burdened with increasing debt and their interest payments take a significant share of their income.
American capitalism on its own has not managed to produce enough common prosperity. Great wealth did not “trickle down” to the working class. Instead, government had to create a huge number of bandages and transfer payments to prop up the living standards of the working class.
As for American democracy, we celebrate the idea of one vote per citizen. In practice, the wealthy have considerably more influence and power in determining who gets elected. Candidates running for office need mass support to cover their expenses during the months of electioneering. They use their own means, solicit their family and friends, and hope to find a few wealthy donors. To the extent that they get much support from wealthy donors, this affects how they vote. Successful candidates with major donors favor conservative policies that won’t alienate their donors. Candidates who have liberal donors or who have won broad support from their constituent voters have more freedom to vote their views. Ultimately, candidates must gauge and respect the wishes of the majority of voters in their district.
Much legislation in Congress is influenced by the activities of well-financed lobbyists pursuing the interests of large companies. The governing boards of large companies consist of wealthy citizens, former politicians, ex-government executives, retired military people, academic professors and administrators, industry experts, many of whom prefer the least number of regulations or taxation. Many board members prefer that workers are without unions or voice in shaping their company’s policies. Companies are not designed to be democracies. Policies of most companies reflect the interests of the owner and investor class.
American Capitalism largely dictates which policies will be passed by Congress. Citizen polls may show that most Americans favor a national ban on assault rifles. Yet Congress fails to propose or pass such a ban. Citizen polls may show that most Americans believe women have a right to choose an abortion, especially if she was raped or bearing a deformed embryo. For many years, Congress treated this as a women’s right. Yet the Supreme Court says this is not a right guaranteed in the Constitution. So, it is a matter for the States to decide.
Legislation often fails to reflect majority opinion. Real democracies always carry some imperfections. Furthermore, democracy is often threatened with economic crises such as recession, depression or inflation. The presiding President in these circumstances is often driven to take more control to “save the nation.” Several former democracies — Hungary, Turkey, Malaysia, Venezuela, Kazakhstan, Philippines — morphed into dictatorships. When it comes to saving an economy or a democracy, often the preference is to save the economy.
Now to the second question.
Does Democracy Weaken Capitalism?
The essence of democracy is to make sure that the majority opinion of American citizens on various issues runs the country. In ancient Greece, the birthplace of democracy, free citizens voted on various issues and the majority opinion prevailed.
American democracy does not use direct issue voting by its citizens. Our political system is designed to be a republic. American citizens vote for which representatives in their district should represent them in the legislature. Two thirds of American voters are split fairly evenly between being Democrats (liberals) and Republicans (conservatives). The remaining one-third of citizens are independent or favor smaller political parties.
Let’s Imagine a democracy where citizens have power, where labor is unionized, where voting laws are respected. Assume that citizens want to end poverty, improve the quality of public education, and have affordable colleges, healthcare and childcare. Further assume that citizens have livable minimum wages, social security, and needed social services for those persons who are hungry, needy or disabled.
This sounds like an ideal democracy. However, all of these “goods” costs money. The costs would have to be borne by someone.
Here is where tax policy has to operate. The most logical answer is to pass higher taxes on the rich. They are the only group for whom higher taxes would not diminish their standard of living. During the period 1930–1980, the top income tax rate on high earners was 82 percent. This high tax rate did not stop economic growth or innovation. In fact, this period created the largest middle class.
Starting in 1980, conservatives pushed for deep reductions in the maximum income tax rate. The top tax rate now stands at 37 percent. This has contributed to the outstanding growth of wealth in the rich class. Today’s Chief Executive Officers of corporations earn about 350 times what they pay the average workers in their companies. The original “fair” ratio was CEOs receiving 20 times the average worker rate.
The rich put most of their wealth into property, stocks and bonds and deposits abroad where it is hard to tax. The wealth is passed on to family members at relatively low inheritance tax rates. Expert tax advisors help rich families to pay the least taxes over time. The average tax rate of wealthy families is 8 percent, much less than the rate tax rate paid by teachers, plumbers, and nurses.
Recently, President Biden said that there would be no tax increases on any citizen earning less than $400,000. Senators Bernie Sanders and Elizabeth Warren aim to go further. They are pressing for raising the tax rate on the rich and adding a wealth tax for the first time. Thomas Piketty, the economist, called for “Tax the super-rich at 90 per cent.”
The available money exists to fulfill the dream of a better democracy marked by increased spending on education, health, and childcare. Conservative critics counter that higher taxes would reduce investment in the economy and result in slower economic growth. We would have a stronger democracy but a weaker economy.
Liberals counter that businesses would continue to invest and workers would receive a better income, have more money to spend, and the economy would be strengthened further. Liberals claim that the country would have both a stronger democracy and a stronger economy. The two great systems are seen as compatible in the minds of liberals.
The pressing need is to encourage more public discussion and debate on these issues. We need to redefine the proper rate of economic growth as well as the proper percentages in its distribution. We must also take into account the growing impact of climate change. The more economic growth, the more carbon, the more heating of the ocean, the worse the climate problems, and the likelihood of more mass migration fleeing the hottest areas of the earth. The need today is to add sustainability to profitability as the objectives of companies. The times call for reinventing our views of capitalism and democracy. Can they both work better together to serve the common good?