Capitalism without democracy?

Is capitalism indifferent to the form of government? Not in its pure form of market capitalism.

Just like competition and free markets are indispensable for economic success, democracy and freedom are essential for a good system of government and the rule of law. For this reason, capitalism and democracy are often said to go hand in hand.

Yet, there are some on the right and left who still believe the opposite. Some take such view on the basis of a mistaken interpretation of democracy and capitalism, while others simply dislike the outcomes of both systems.

Democracy is “Government of the people, by the people, for the people”. This form of government is achieved through majority rule by people's representatives, subject to the constitutional separation of powers and the rights of the minorities, who are elected periodically on the basis of one person one vote.

The alternatives to democracy can be gathered into two groups – totalitarian and authoritarian. Totalitarian regimes are typically governed by a despot or a small group of leaders, invoking an ideology or religion as the general basis for all aspects of life, where any form of opposition is brutally repressed. Authoritarian regimes are a softer version with less dogmatism in terms of ideology or creed, and granting some level of economic and religious freedom as long as their personal enrichment and hold on power is not challenged.

Former examples of totalitarian regimes include Nazi Germany and Stalin’s USSR, while living examples can be found now in countries like North Korea and Saudi Arabia. Today, the classification as totalitarian or authoritarian in countries like Iran, Russia or China is controversial.

For instance, the classification within a given category is not indifferent to the regime evolution, and in this sense one may say that China is moving towards an authoritarian regime while Russia is moving towards a totalitarian system, although, objectively, now there is still more freedom in Russia than in China. Likewise, the distinction between democratic and authoritarian regimes is also controversial in countries like Singapore.

In fact, nowadays, authoritarian and totalitarian regimes do not follow an open anti-capitalist ideology and may even portray as strong capitalist supporters, as long as their rule is not challenged.

The two standard yardsticks to judge the evolution of a political regime are the direct state involvement in the economy and the exercise of civic freedoms under the rule of law. These do not necessarily preclude regimes with strong leaders or with one-party long-term dominance.

However, these inevitably end up creating a self-perpetuating elite that will oppose any competition. To overcome such danger the pursuit of liberalism constitutes an important antidote to preserve both capitalism and democracy.

Indeed representative democracy and capitalism share similar problems in terms of governance. As sometimes I remind my students, there is a remarkable similitude between shareholders and electors. For instance, elections are the equivalent of the shareholders annual meeting, asset managers are similar to political parties, the board of directors resembles the parliament, and the executive officers the government while the senior managers are like the top civil servants.

Therefore, they share similar challenges. For instance, in terms of representation, the need to avoid a divorce between the electors and the elected is analogous to the separation between shareholders and management. Likewise, the rise of self-perpetuating insider elites in political parties is similar to that found in the selection of company board members.

Not surprisingly, the false alternatives to representative democracy, namely direct and “guided” democracy, have an equivalent in the attempts to extend voting rights to non-shareholders and on collusion to adopt rules restricting voting rights.

In conclusion, capitalism and democracy are two distinct but mutually-reinforcing systems. When in pursuit of their true form – market capitalism and representative democracy – they are inseparable. Temporary moves away from any one of them is only possible for short periods or under perverse forms of capitalism.