capitalism vs democracy essay

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Do Democracy and Capitalism Really Need Each Other?

• Laura Amico

Scholars from around the world weigh in.

Democracy and capitalism coexist in many variations around the world, each continuously reshaped by the conditions and the people forming them. Increasingly, people have deep concerns about both. In a recent global survey, Pew found that, among respondents in 27 countries, 51% are dissatisfied with how democracy is working. Further, Millennials and Gen Zs are increasingly disinterested in capitalism, with only half of them viewing it positively in the United States .

• Laura Amico is a former senior editor at Harvard Business Review.

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Democracy field notes

Questions about the troubled spirit and ailing institutions of contemporary democracy

Capitalism and Democracy [part 1]

Professor of Politics, University of Sydney

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Let’s begin with a discomforting fact often forgotten in recent years: ‘free market’ capitalism is not necessarily the best friend of democracy. Since the early years of the 19th century, especially during periods of economic stagnation and mass unemployment, the relationship between capitalism and democracy has actually been a source of great social unrest, state violence and public pressures for institutional reform. That’s why, at various moments during the past two centuries, the modern capitalist system has been charged by its critics with crushing the spirit and substance of representative self-government.

Shortly after World War One, the American economist and sociologist Thorstein Veblen captured the point in a famous formulation. There are historical moments, he noted, when ‘democratic sovereignty’ is converted into ‘a cloak to cover the nakedness of a government that does business for the kept classes’.

The current period of global recession and stagnation, centred in the Atlantic region, has helped revive new versions of this old formula. Thanks especially to the work of prominent European political economists, political analysts and historians, Wolfgang Streeck , Colin Crouch , Thomas Piketty and Jürgen Kocka among them, the subject of capitalism versus democracy is back. Market failures are having political effects; they are breathing new life into an old subject that demands fresh thinking and a new democratic politics that, so far, has not happened on any scale.

One shortcoming of the new European contributions is their general reluctance to engage details of the long history of links between democracy and markets. What can be learned from the deep past? Well, minimally, the famous remark by the historian Barrington Moore Jr , ‘no bourgeois, no democracy’, turns out to be less than plausible. The historical record suggests that things have been more complex, that viable democratic institutions, such as citizens assemblies, public juries, watchdog bodies, political parties and periodic elections, have in fact been contingently related to a wide repertoire of property forms.

The early Greek assembly democracies, for instance, enjoyed a functional but tense relationship with commodity production and exchange. Within these polities, the life of (male) citizens was widely seen as standing in opposition to the production of goods and services by women and slaves in the sphere of the oikos . Politics trumped economics; democracy rested upon slavery. By contrast, the modern forms of representative democracy that first sprang up in the Low Countries, at the end of the sixteenth century, were tightly bound to profit-driven commodity production and exchange. Modern capitalism and representative democracy were twins. The pair often quarrelled. ‘The further democratisation advanced’, the distinguished German historian Jürgen Kocka notes, ‘the more likely it was to find large parts of the bourgeoisie on the side of those who warned against, criticised or opposed further democratisation.’

At the outset, things seemed otherwise. Modern capitalism appeared to be supportive of parliamentary government. Capitalist dynamics helped gradually erode older forms of unequal dependency of the feudal, monarchic and patriarchal kind. The spread of commodity production and exchange triggered tensions between state power and property-owning and creditor citizens jealous of their liberties provided by civil society. Modern capitalism also laid the foundations for the radicalisation of civil society, in the shape of the birth of social democracy backed by powerful mass movements of workers protected by trade unions, political parties and governments committed to widening the franchise and building welfare state institutions.

This much is clear. Yet since early modern times, and especially after 1945, capitalist markets have been a mixed blessing for democracy in representative form. The dynamism, technical innovation and enhanced productivity of 'free’ markets have been impressive. Equally notable have been their rapaciousness, unequal (class-structured) outcomes, reckless exploitation of nature and their vulnerability to bubbles, whose inevitable bursting generates wild downturns. These downturns typically breed populist manias, fear and misery in people’s lives, in the process destabilising democratic institutions, as happened on a global scale during the 1920s and 1930s, and is again happening today, with accelerating momentum.

How can we best summarise the relationship between capitalism and democracy today? Here’s an inexact but pithy formula: in these early years of the 21st century, monitory democracies can neither live with capitalist markets nor live without capitalist markets. The formula is designed to unsettle. It aims to provoke second thoughts and fresh thinking; along the way, it also helps to shed some light on the wildly divergent scholarly and political assessments of the future of capitalism and democracy.

Free markets?

According to defenders of the ‘free market’, more than a few of whom are dogmatic market fundamentalists, political democracy is an unwanted parasite on the body of economic growth. Democracy whips up unrealistic public passions and fantasies. It distorts and paralyses the spirit and substance of rational calculations upon which markets functionally depend; understood as government based on majority rule, democracy is said to be profoundly at odds with free competition, individual liberty and the rule of law. What is therefore required is ‘ democratic pessimism ’ and (Friedrich von Hayek’s famous thesis) the restriction of majority-rule democracy in favour of ‘austerity’ (cutbacks and restructuring of state spending) and limited constitutional government (‘demarchy’ ) whose job is to protect and nurture ‘free markets’ protected by the rule of law.

Other scholars, political commentators, policy makers and politicians stake out the contrary view. They maintain that since markets are never ‘naturally’ free but always, in one way or another, the creature of laws and governing institutions, market failures and market ‘externalities’ require political correction. Well-designed political interventions that draw democratic strength from popular consent are needed to redistribute income and wealth, to repair environmental damage caused by markets and to breathe new life into the old ideals of equality, freedom and solidarity of citizens.

Exactly what this general democratic formula means in practice has been hotly disputed since the earliest (19th-century Chartist and co-operative movement) public attacks on markets in the name of ‘the people’. The democratisation of markets has meant different things at different times to different groups of people. For some analysts, democracy requires the replacement of markets by the principles of Humanity ( Giuseppe Mazzini ), or by communist visions of ‘social individuality’ (Karl Marx) and post-market individualism ( C.B. Macpherson ). For the majority of card-carrying democrats of the past century, the democratisation of markets meant greater state intervention and control of markets. When confronted with the collapse of the Soviet model of socialism, some analysts tried to develop fruitful comparisons among contemporary Anglo-Saxon, Rhineland, Japanese, Indian, Chinese and other ‘varieties of capitalism’. Recognising that parliamentary democracy is constantly vulnerable to corporate ‘kidnapping’, these analysts champion updated versions of the social democratic vision of liberating (‘de-commodifying’) areas of life currently in the grip of unregulated markets. What is needed, they argue, is the restriction of markets: new government policies that ‘socialise’ the unjust effects of competition by ‘embedding’ markets within civil society institutions guaranteed by election victories, welfare mechanisms and legal regulation.

Whether such policies and regulations can succeed without straddling borders and through state efforts alone remains an open question. Yet the broad vision is bold, and clear: in defence of the democratic principle of equality, government instruments are needed to limit ‘predatory’ forms of capitalism. The priority is to protect people and their ecosystems, to nurture social citizenship rights through a politics of redistribution that includes the defence of public services, raising the minimum wage and enforcing new contract law arrangements that empower workers and consumer citizens.

Such proposals for a new politics of breaking the grip of capitalist markets on people’s lives are important, above all because they restore the old subject of worsening inequality to its rightful place in scholarly work on democracy. Pauperism mixed with plutocracy is today a feature of practically every democracy on our planet. Things are everywhere growing worse, not better. For all democrats and scholars sympathetic to democracy, disparities between rich and poor ought to be intellectually and politically scandalous. ‘Enough is enough’ should be the new democratic mantra.

Among the top priorities of researchers must be to remind citizens and their representatives that wide gaps between rich and poor, in the long run, have ruinous effects on civil society and the whole political order. Citizens in unequal societies, many researchers have shown , more likely end up sick, obese, unhappy, unsafe, or in jail. Such dysfunctions, in various ways, impact the lives of the rich. Even plutocrats feel the pinch; nobody is safe from the scourge of inequality. Inequality is perversely egalitarian.

Whether in South Africa, Greece, Brazil or the United States, market inequality endangers the spirit and institutions of monitory democracy in other ways. Concentrated wealth likes secrecy, surveillance and law and order. It outvotes ballots; and wealth tilts public policy in favour of the rich, towards short-sighted rewards or special treatment (deregulation, tax breaks) and away from the public goods (education, infrastructure) so essential to future economic growth. Finally, in normative terms, capitalist inequality plainly contradicts the democratic spirit of equality. Like salt to the sea, the principle of equality is the quintessence of the democratic ideal. That’s why, historically speaking, every form of democracy worth its salt has stood against the presumption that the wealthy are ‘naturally’ entitled to rule. When they don’t, and when the gap between rich and poor grows ever wider, they are asking for political trouble.

To be continued….

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Democracy is in deeper trouble than capitalism

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March 18, 2020

This piece originally appeared in the Harvard Business Review , as part of their 5-Part Series: Democracy Under Attack, on March 11, 2020.

Capitalism and democracy absolutely need each other to survive, but right now it is democracy that is most threatened.

Capitalism is the right way to organize an economy, but it’s not a good way to organize a society. Markets do a good job of allocating resources, fostering dynamism, and preserving individual choice, but they cannot solve climate change, too much inequality, or the plight of workers whose jobs have been destroyed by trade or technology.

When government fails to address these or other systemic problems, democracy begins to lose its legitimacy. In desperation, citizens turn to populists on the right or the left. If these leaders then prove unable to keep their promises, trust in government erodes further. Political instability begins to threaten capitalism itself.

We are now seeing that spiral in action. Dissatisfaction with democracy in the U.S. has risen by  one-third  since the mid-1990s and now includes about half the population, according to the Centre for the Future of Democracy at Cambridge University. It was the  white working class, whose counties had been ravaged by a loss of jobs , that elected Donald Trump in 2016. Yes, his supporters had cultural anxieties (opposition to immigration in particular) in addition to economic ones, but there’s no denying the  surprisingly strong  county-level correlation of votes for Trump with long-term economic distress, very low employment rates, plant closings related to trade, and the location of the opioid epidemic.

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Now the U.S. is in the midst of another presidential campaign and the signposts of instability are rising on the left. If Bernie Sanders wins the Democratic nomination this year, it will be clear that it is not just the working class that is fed up but also young people and progressives, who believe the system is corrupt and that only a democratic socialist can save the day. But a Sanders revolution would almost surely disappoint his voters further, since enacting most of his proposals is politically infeasible, leading to more fraying of trust in government.

Fewer than  half of 18- to 29-year-olds  now support capitalism. They are right that markets without guardrails do not produce a healthy society. But a government that overreaches by trying to replace the market in areas like health care or job creation will not restore that trust. This is the balancing act we face.

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Is Capitalism Compatible with Democracy?

• First Online: 09 March 2018

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• Wolfgang Merkel 3 , 4  

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Capitalism and democracy follow different logics. During the first postwar decades, tensions between the two were moderated through the sociopolitical embedding of capitalism by an interventionist tax and welfare state. Yet, the financialization of capitalism since the 1980s has broken the precarious capitalist-democratic compromise. Socioeconomic inequality has risen continuously and has transformed directly into political inequality. The lower third of developed societies has retreated silently from political participation; thus its preferences are less represented in parliament and government. Deregulated and globalized markets have seriously inhibited the ability of democratic governments to govern. If these challenges are not met with democratic and economic reforms, democracy may slowly transform into an oligarchy, formally legitimized by general elections. It is not the crisis of capitalism that challenges democracy but its neoliberal triumph.

A first German version was co-authored by Jürgen Kocka in: Wolfgang Merkel (Ed.) Demokratie und Krise (Democracy and Crisis). Wiesbaden, Springer, 2015

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Hall and Soskice, however, only describe two varieties of capitalism that they see represented in the context of the OECD: liberal market economies and coordinated market economies . New hybrid types of Manchester-like state capitalism in China, gangster capitalism in Russia and Ukraine during the 1990s, and crony capitalism in Southeast Asia are not taken into consideration here, since they have emerged outside the context of the OECD.

The labels for this type of capitalism vary: “organized capitalism,” “coordinated capitalism,” “Keynesian welfare state” (KWS), or “Fordism.” We use the first two terms interchangeably and take KWS as a variety of “coordinated capitalism” that is particularly compatible with democracy.

Cf. more extensively, Merkel ( 2004 ).

Such cuts were only moderate in Scandinavia, Germany, Austria, and France but drastic within the context of Anglo-Saxon economies (USA, UK, NZ).

The welfare state and Keynesianism were, of course, developed to different degrees within the OECD countries (Esping-Andersen 1990 ; Hall and Soskice 2001 ).

It is thus even more surprising that neoclassical economics and neoliberal political forces question this relationship. They see political equality fulfilled by the equal availability of political rights (see von Hayek 1978 ; the Free Democratic Party of Germany (FDP) and the liberal political parties in the Netherlands and Scandinavia, respectively).

When asked whether their vote or political participation influence political decision-making, more than two-thirds of lower class citizens in Germany answered in the negative. When confronted with the same question, a resounding two-thirds and more of middle class citizens responded in the affirmative, stating that their voice had an impact (Merkel and Petring 2012 ).

The exclusive character of US democracy becomes even more apparent if the 10–15% of the lower class without citizenship are taken into account. A considerably smaller section of the population (5%) at the upper end of the income scale does not have citizenship (Bonica et al. 2013 , p. 110).

The financial crisis and the bottom-up redistributive effects that have become apparent within the context of the crisis seem nonetheless to have reached social democratic parties. The minimum wage and the effects of deregulation on the financial and labor markets have, after two decades, slowly made their way back to the top of party agendas.

In non-Anglo-Saxon countries, this shift did not happen by cutting back the welfare state but was pushed through by a tax and income policy in favor of business and the better-off.

The US government followed the capitalist rules of a free market more closely when it allowed many more banks to go bankrupt then did European governments.

US democracy is, of course, older than that. But even there universal suffrage for women was introduced only in 1920 (in the UK in 1928, in France in 1945). Until the mid-1960s, six southern US states banned African Americans from voting for racist reasons. Only since that period can the “mother country” of democracy be seen as having fully implemented democratic values.

If one takes full suffrage of men and women as the crucial indicator for a complete democracy, then New Zealand (1900) was the first and Australia one of the first democracies, not the USA or UK.

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Merkel, W. (2018). Is Capitalism Compatible with Democracy?. In: Merkel, W., Kneip, S. (eds) Democracy and Crisis. Springer, Cham. https://doi.org/10.1007/978-3-319-72559-8_11

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Steel mill, Youngstown Ohio, 1953. Photo by Library of Congress

Liberalism against capitalism

The work of john rawls shows that liberal values of equality and freedom are fundamentally incompatible with capitalism.

by Colin Bradley   + BIO

Completed in 1910, the renaissance revivalist Mahoning County Courthouse in Youngstown, Ohio would make any city proud. Its Honduran mahogany, terracotta, 12 marble columns and 40-foot diameter stained-glass dome stand testament to the region’s turn-of-the-century success as a moderate industrial power. Across Market Street, the humbler federal courthouse completed in 1995 invokes a then- au courant corporate office-building style: concrete and panelised stone relieved by blue-black glass, with decorative squares and circles scattered here and there.

The Thomas D Lambros Federal Building and Courthouse is named for Judge Thomas Demetrios Lambros (1930-2019), native son of Ashtabula, Ohio, who in 1967 was appointed to the federal bench by the US president Lyndon B Johnson. The website of the US General Services Administration remembers Judge Lambros as ‘a pioneer in the alternative dispute resolution movement’ – arbitration, as it is generally known. But the people of Youngstown and the Mahoning Valley might remember Judge Lambros for a different reason.

Lambros presided over a fiercely contested lawsuit in 1979-80 filed by 3,500 steelworkers laid off by United States Steel Corporation’s Youngstown Works plant – part of a wave of closures across what we now call the Rust Belt. The lawsuit was an avowedly desperate effort to compel US Steel to sell the company either to the city or else to the workers who, hopefully with federal loans, would continue to operate the plant and keep sending paychecks to the thousands of families depending on them.

In an early hearing, Judge Lambros made a remarkable – revolutionary, almost – suggestion to the workers’ lawyers. They might have a shot if they argued that the people of Youngstown had a ‘community property right’ accrued from the ‘lengthy, long-established relationship between United States Steel, the steel industry as an institution, the community in Youngstown, the people of Mahoning County, and the Mahoning Valley in having given and devoted their lives to this industry’. Because steel production had become such a central part of community life, the judge suggested, the community arguably had a right to decide what happened to the steel mill.

The suit failed. When called upon to issue a ruling in the Youngstown case, Judge Lambros turned on his own suggestion. There just was no precedent in US law to say that the workers or the people really had such a ‘community property right’. Lambros was torn between his moral sense that they should have one, and his professional duty as a judge to find that the law (then as now) recognised no such right. Youngstown Works shuttered for good.

J udge Lambros’s profound ambivalence reflects a contradiction that seems to lie at the heart of liberalism. On the one hand, the promise of a liberal society is of a society of equals – of people who are equally entitled and empowered to make decisions about their own lives, and who are equal participants in the collective governance of that society. Liberalism professes to achieve this by protecting liberties. Some of these are personal liberties. I get to decide how to style my hair, which religion to profess, what I say or don’t say, which groups I join, and what I do with my own property. Some of these liberties are political: I should have the same chance as anyone else to influence the direction of our society and government by voting, joining political parties, marching and demonstrating, standing for office, writing op-eds, or organising support for causes or candidates.

On the other hand, liberalism is usually uttered in the same breath as capitalism. Capitalism is a social system characterised by the fact that private persons (or legal entities like corporations) own the means of production. Combined with liberalism’s protection of rights and liberties, this means that, just as I get to decide what to do with what I own (a 2004 Hyundai with a busted A/C unit and squeaky wheel bearings), so did the legal entity US Steel get to decide what to do with what it owned: the Youngstown Works.

Liberalism’s apparent commitment to capitalism threatens to prevent it from delivering on all that it promises. To see this, it is important to remember that formal political processes do not exhaust the way our society governs itself. One of the main tasks for a society is to organise economic production. We humans are a species that makes stuff. We make tools, dwellings, food, art, culture, more little humans, and much else. Moreover, we usually do this together, as a joint activity. Such cooperative production inevitably produces a division of labour: some hunt while others gather; some fish while others sow; some design artificial intelligence while others squeegee windows at the stop light.

When societies industrialise, achieving economies of scale and the capacity to purchase cutting-edge technologies needed for profitable production becomes extremely expensive. So expensive, in fact, that it is possible only for a relatively small number of people or entities to do it. This leads not just to a division of labour, but to a class-stratified society. Some people – capitalists – own the materials or technologies that produce society’s wealth, while other people – workers – have to work for the capitalists in exchange for a wage. In such a class-stratified society, capitalists not only make the important investment decisions that guide society’s overall direction, but they are also effectively private dictators telling their workers what to do, when to do it, what to wear, when to pee, and what to post online. Given liberalism’s defence of the capitalists’ rights to do all this, it is hard to see how liberalism might reliably achieve its goal of bringing about a society of equals in which we all have a share in our collective governance. Hence the contradiction at its heart, and Judge Lambros’s ambivalence.

Liberals rarely question the basics of political economy like who owns what and lords it over whom

The political-economic background of the Youngstown closure is an object of ongoing controversy among historians, economists and sociologists. All agree that it was part of the phenomenon of ‘globalisation’. But whereas the former US president Bill Clinton – whose administration oversaw the construction of the Lambros Federal Building – could declare in 2000 that globalisation was ‘the economic equivalent of a force of nature’, nobody seriously believes that anymore. Under US leadership (itself a response to Chinese rivalry), the world is turning toward ‘neomercantilism’, embracing strategies whereby governments protect domestic industries while intervening mightily in markets, imposing carrots and sticks to steer private investors toward targeted economic goals like place-based investments in green technology.

This means that the way society organises production has re-emerged as a contested political issue. But it does so in a fractured ideological moment. Liberalism’s hegemony is perhaps at a nadir. Populist authoritarians and ‘illiberal democrats’ have attracted a surprising level of legitimacy and support, while post-liberal ideologies look ahead to new possibilities. Critics on the Left and the Right offer two main visons of the near-future. On the Left, critics suspect that the return of industrial policy might be less than the ‘new economic world order’ its proponents tout it to be, reflecting liberalism’s inability to get to the root of capitalism’s problems. Those who hold this view, like the economist Daniela Gabor, see legislative efforts like the US president Joe Biden’s Inflation Reduction Act (IRA) or the European industrial policy proposed by the French president Emmanuel Macron as merely underwriting private profit-making by using the state to ‘de-risk’ some capital investments, making them safer for capitalists who reap massive rewards with little downside. Some socialists even go so far as to suggest that Biden’s IRA is a regression to a kind of feudalism. On the Right, some so-called post-liberals, like the political theorist Patrick Deneen, hope that an industrial policy focused on restoring blue-collar manufacturing jobs to the US heartland will turn out to be a revolutionary first step toward throwing out liberalism with all its (hypocritical) aspirations for individual liberties and social equality.

This dichotomy ignores the possibility of a liberal anticapitalism . This may sound like an oxymoron. Neither liberals nor their critics disentangle liberalism from capitalism (though some historians have begun to). Most liberals even emphasise the happy marriage between the two. Among those liberal egalitarians who stress the redistributive New Deal as liberalism’s moral core, few seriously grapple with big issues of political economy. Liberals advance institutional and procedural solutions – ‘structural change’ to representative processes, expanding voting access, etc – but rarely question the basics of political economy like who owns what and lords it over whom.

That makes it all the more surprising that liberalism’s greatest philosophical exponent, John Rawls, developed a sustained, systematic and principled argument that even the most humane, welfarist form of capitalism is incompatible with the possibility of achieving liberalism’s deepest aim: free people living together in a society of equals. These arguments should be much better known.

Contrary to a common caricature of his views, Rawls does not reduce politics to technocratic nudges and tinkering with marginal tax rates. Liberalism is a philosophy of the ‘basic structure’ of society. The basic structure includes a society’s fundamental institutions: not only political structures like constitutions (where they exist), but also markets and property rights. Everything is up for moral assessment, not just considered abstractly, but with respect to how different institutions interact with one another and with ordinary human behaviour, over the course of generations.

‘Everything’ here includes the basics of political economy like who makes what and who owns what, and who decides. Crucially, for Rawls, this includes the way society organises the production of goods and services. Focusing on the inequalities and domination that arise from the way capitalism empowers a small group to control how we produce society’s wealth, Rawls argues that no form of capitalism can ever cohere with the liberal ideal of a society of equals. Social equality and basic liberties will always be thwarted by it.

Rawls’s corpus is complex and contested. But we don’t need to agree with him on everything. Even if we ditch the larger Rawlsian apparatus and the many tweaks he made on particular topics after the publication of A Theory of Justice (1971), he stated the core of a liberal, anticapitalist political economy, and never abandoned the conviction that a liberal society must overcome capitalism.

F or Rawls, liberalism revolves around two ideals: society as a fair system of cooperation, and people as free, equal, capable of acts of joy, kindness and creativity; and disposed – if not always without reluctance – to cooperate with one another to flourish. Rawls shows that these ideals lead to principles that we can appeal to in designing, improving and maintaining our basic political and economic structures.

Capitalism is an economic system with three features. First, Rawls said it is a ‘social system based on private property in the means of production’. It allows almost unfettered private ownership of not only personal property, but also the highly valuable and productive industrial and financial assets of a society – what Vladimir Lenin in 1922 called the ‘commanding heights’ of the economy. Second, it allocates access to private property primarily via markets. This includes markets in goods, markets in financial products, and markets in labour. That leads to the third feature: most people – workers – try to earn enough to support themselves or their families by selling their labour for a wage to a capitalist who owns the means of production.

As a result of this, capitalism is an economic system that produces a class-based society and division of labour. This is what Rawls’s liberal anticapitalism targets, focusing on the obstacles that a class-stratified society of owner-capitalists and workers poses to a genuinely cooperative and emancipatory liberal society. Rawls argues that capitalism violates two core tenets of liberalism: the principles of social equality, and of extensive political liberty. Moreover, reforms that leave the capitalist core in place are unlikely to be stable. Let’s look at each of these in turn.

Social equality

One component of social equality is fair equality of opportunity. Your chances at attaining or succeeding in any valued role should not depend on aspects of your birth or circumstance over which you had little or no control. All current societies fail to meet this: race, gender, religion, disability, sexuality and other circumstances favour the chances of some over others. Likewise, in a class-stratified capitalist society, whether you or your parents own productive assets significantly determines your life chances. So, fair equality of opportunity is unlikely under capitalism. I say ‘unlikely’ because it is possible that a capitalist welfare state could promote equal opportunity by investing heavily in education and healthcare.

But even a society that fulfilled equal opportunity would still fall short of the full ideal of liberal equality. More difficult to specify but infinitely more powerful than equal opportunity is the value Rawls called ‘reciprocity’. This is the idea that it matters that we are, are seen by others as, and see ourselves as, fully participating members of society, on equal footing and status with other participants. Capitalism makes reciprocity impossible because it requires a division of labour that prises apart the ‘social roles and aims of capitalists and workers’. Consequently, Rawls said, ‘in a capitalist social system, it is the capitalists who, individually and in competition with one another, make society’s decisions’ about how to invest its resources and what and how to produce. This makes it hard for workers to see themselves as active participants in directing society because, well, they aren’t (with the limited exception of voting in a ballot every few years).

Capitalist make important decisions on behalf of society, yet their interests diverge from those of the working class

This is what the people of Youngstown learned when the owners of US Steel decided to move the factory away. Likewise, today the CEO of McDonald’s can tell his employees that ‘we’re all in this together’ until he’s blue in the face, even though he gets more than 1,150 times what they do per hour and makes all the decisions about how they spend their time. When this is true, ‘society’ simply feels like something we are ‘caught in’ rather than something we are making and sustaining together, Rawls wrote in Political Liberalism (1993).

Such capitalists make important decisions on behalf of society, yet their interests diverge from the interests of the working class. This is a form of social domination. Rawls worried that those who do not own the means of production will be ‘viewed both by themselves and by others as inferior’ and will likely develop ‘attitudes of deference and servility’ while the owners grow accustomed to a ‘will to dominate’. This conflicts with a true ‘social bond’ between equals, which calls on us to make a ‘public political commitment to preserve the conditions their equal relation requires’, as he wrote in Justice as Fairness: A Restatement (2001).

Political liberty

Capitalism is also inconsistent with the basic liberal value of political liberty. Political scientists have been arguing for some time that advanced democracies like the United States and Western Europe are probably better characterised as oligarchies, since their policies bear almost no relation to the interests of the poor when these deviate from those of the wealthy. The usual suggested solution is to ‘get money out of politics’ by reforming campaign finance rules.

But the Youngstown Works story suggests something even deeper. The steelworkers actually enjoyed considerable political support in their fight. They were represented by President Johnson’s former attorney general, Ramsey Clark. Meanwhile, the Youngstown City Council, the Ohio State Legislature, and the US House Committee on Ways and Means all took some action on their behalf. But, as Judge Lambros finally conceded, none of these were a match for the power of capital.

Anticipating the economist Thomas Piketty’s claim in Capital in the Twenty-First Century (2013) that capitalist societies ‘drift toward oligarchy’, Rawls argued that economic and political inequality ‘tend to go hand in hand’, and this fact encourages the wealthy to ‘enact a system of law and property ensuring their dominant position, not only in politics, but throughout the economy’. The wealthy use their dominant position to set the legislative and regulatory agendas, monopolise public conversation, hold political decision-making hostage by threatening capital flight, and engage in outright corruption. Reforming campaign finance rules to keep money out of politics is perhaps an important start in curbing this tendency. But it’s just a start.

Rawls was sensitive to Karl­ Marx’s criticism that liberal rights might be empty or merely formal – naming protections without really providing them. In response, Rawls insisted that rights to political participation must be given ‘fair value’. In A Theory of Justice , he observed that the full policies needed to protect political liberty ‘never seem to have been seriously entertained’ in capitalist societies. The reason is that the conversion of economic inequality to political domination happens quickly . ‘Political power rapidly accumulates’ when property holdings are unequal, and the ‘inequities in the economic and social system may soon undermine whatever political equality might have existed’. Ensuring political liberty therefore requires us not just to restrict the use of money in politics but, in Rawls’s words, ‘to prevent excessive concentrations of property and wealth’ in the first place.

Altering property rights goes near the heart of capital’s power

As Piketty and his colleagues have shown, today’s stupefying level of inequality has two primary sources: massive income inequality aided by lower top-marginal tax rates, and a high rate of return on capital compared with returns on labour. Compound interest for the rich keeps making the rich richer as the poor get relatively poorer. Rawls argued we need to address both: the first via taxation and wage controls, and the second by altering the ‘legal definition of property rights’.

It is easy to overlook how radical this latter proposal is. As the legal scholar Katharina Pistor has shown in The Code of Capital (2019), capitalism relies on the legal definition of property rights. Not all property rights accumulate at the rapid rate of capital, nor confer on their owners as much control over other people. Altering property rights therefore goes near the heart of capital’s power. This could take the form of recognising ‘community property rights’ of the sort that Judge Lambros suggested and then backed off from. Or it could involve separating the capitalists’ ownership rights over factory equipment, say, from the rights to manage how that equipment gets used, reserving the latter rights for the workers who actually use it. Liberalism may protect property of some kind, but not necessarily give the turbocharged property rights that capitalists enjoy today.

But can’t we just reform capitalism piecemeal along social-democratic lines to alleviate these problems? Rawls says no: reformed capitalism would just swiftly revert back to inequality and domination. This is the problem of instability. We must ask of any proposed regime, like a reformed welfare-state capitalism, whether it ‘generates political and economic forces that make it depart all too widely from its ideal institutional description’. To assess a conception of justice or an institutional arrangement intended to satisfy it, we need to consider how the political, social, psychological and economic dynamics it is likely to foster will play out over time.

Central to Rawls’s understanding of stability was Marx’s observation in ‘On the Jewish Question’ (1844) that ‘while ideally politics takes precedence over money’, under capitalism, ‘in fact politics has become the servant of money’. It’s not enough to recognise some domain as ‘political’ and to try to summon the ‘political will’ to change it. Political power – the legislative and policymaking power of the state – cannot simply achieve anything it desires. It is constrained by, among other things, the power of capital. It is vital to understand how the dynamics of capital ownership may thwart proposed political interventions. Many of these are familiar: the regulatory race to the bottom fuelled by the threat of capital flight; ‘market discipline’; creditors imposing austerity and structural adjustment on not-so-sovereign nations.

Rawls had little to say about how social organising might challenge capital’s political hegemony, and here perhaps most of all we must look elsewhere for guidance. But he understood that, so long as capital reigns, liberal politics is doomed to be ineffective. Any exertion of political will that leaves in place the political economic core of capitalism will preserve a class-stratified society based on the unequal ownership of the means of production and a destabilising and demeaning division of labour.

A t this point, one might wonder how useful all this abstract moral criticism of capitalism really is. On the Right, some may dismiss it as otiose since there is no serious alternative to capitalism, and anyway these moral criticisms haven’t acknowledged capitalism’s primary advantage: its productivity and ability to make more stuff for more people. On the Left, some may suspect that abstract political philosophising is perhaps interesting, but ultimately useless – like a Fabergé egg, as the Marxist political theorist William Clare Roberts described Rawls’s theory: beautiful, well-crafted, but ultimately useless. Capitalism won’t be overcome by convincing ourselves that it is unjust: that requires revolutionary action.

But as advocates of ‘moral economy’, including the legal scholars associated with the Law and Political Economy project acknowledge, there is an important role for moral criticism of political economy of the type that Rawls and others have furnished. This can provide clarity and focus. Especially when empirical information about economic trends is noisy, moral critique provides a kind of compass.

This leaves the question what liberal anticapitalism looks like. Rawls thought there were two, possibly just, types of regime. One, a ‘property-owning democracy’, allows private ownership of the means of production, but only on the condition that private capital is held in roughly equal shares by everyone, preventing the emergence of a significant split between classes of owners and non-owners. This requires hefty wealth and inheritance taxes to spread out ownership of productive assets, and a background welfare state to ensure robust ‘human capital’ by providing both education and healthcare.

Rawls’s liberal critique of capitalism leaves us not with a silver bullet, but with a moral compass and an agenda

The other type of just regime is liberal, or market, socialism. Under market socialism, the state controls the economy overall, but worker-managed firms are left to compete in a closely monitored and adjusted market. This is an attempt to harness the allocative efficiencies of markets and the price mechanism within a socialist system that democratises major investment decisions and prevents private accumulation of significant wealth. Rawls saw in the actually existing socialist states of the 20th century an intolerable absence of political liberty. This is why he insisted that a just socialism would be liberal and should to large extent rely on markets rather than central planning.

But the liberal critique of capitalism that Rawls developed in his later work gives us reasons to be wary still of either of these alternative regimes. It is reasonable to fear, for instance, that markets will simply reproduce the destabilising dynamics Rawls himself identified, as Marx had before him. The Marxist philosopher G A Cohen might well have been right when he declared in Why Not Socialism? (2009) that ‘[e]very market, even a socialist market, is a system of predation.’

This is where Rawls’s liberal critique of capitalism leaves us. Not with a silver bullet, but with a moral compass and an agenda. His critique leaves out some important things. Notably, he had little to say about race and ignored the dynamics of ‘racial capitalism’. No reckoning with capitalism is complete without this dimension. Nevertheless, he helped illuminate the important fact that what we need, and many of us want, are decentralised, cooperative forms of economic production that are consistent with the core liberal values of social equality and basic liberties. But we’ve yet to discover at scale how to have this cake and eat it. Rawls’s work provides little help on this, but fortunately we do not need to rely on his theoretical and philosophical approach in isolation. Here we can turn to social science and to the countless examples of activists and visionaries – from Jackson, Mississippi to Preston, England – developing participatory economics, community wealth-building, and other new and richer forms of what the political theorist Bernard Harcourt today calls ‘coöperism’.

These social experiments are continuations of the efforts of the people of Youngstown in 1980 to claim a right to make decisions about the management of the factory that sustained that community and was sustained by the labour of the steelworkers who operated it, and the women who supported them. These are among small-scale efforts that give us some reason to hope for a more equal and socially just world.

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Is capitalism compatible with democracy?

2014, Zeitschrift für Vergleichende Politikwissenschaft

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The relationship between capitalism and democracy is one that deserves serious scholarship and attention because both terms have come to represent modernity generally, and the 20 th century more specifically. The purpose of this essay is to understand how capitalism and democracy relate to each other, and whether or not democracy can be shown to be antagonistic to capitalism. In other words, the central question driving this essay is to expose whether or not there is a way to conceptualize democracy or political action that would lead to the demise of capitalism. I propose to proceed by dividing this essay into three sections: the first part is a brief sketch of how the inseparable association of capitalism and democracy is a historical construction of the last century, the second part will discuss in what ways and to what degree democracy has been changed by capitalism in order to render it impotent as a resistive force, and the third part will analyse whether or not democracy still holds the potential to bring about the end of capitalism. Section 1

This chapter reviews some theories about the relation between capitalism and democracy. This is a large question and no attempt is made to examine all possible aspects of the relation nor to consider any single aspect in all its detail. Instead I will focus on four concerns: (a) the degree of association between capitalism and democracy, (b) the major determinants or causes of that association, (c) the effects of democratic forms on political class struggle, and (d) future developments in the capitalist state. In each case I present some relevant views advanced by other theorists and comment on them. The chapter concludes with some more general theoretical reflections on the nature of state power in capitalist societies.

Review of Radical Political Economics 50(4) pp. 793-809. (2018)

Annamaria Artner

Adrian Pabst

António Varella Cid

piergiuseppe fortunato

This paper provides a theory to explain why in di¤erent historical experiences di¤erent coalition of social groups have been at the hearth of the democratization process. This issue is addressed using an occupational choice model were four di¤erent social groups interact. As time goes, the capital accumulation process leads to changes in both the composition of society and the labor market equilibrium. In turn, these changes a¤ect the interests of the di¤erent groups and leads to the formation of various possible coalitions in support of democratization.

corey dolgon

Since 1989, due to historical developments and the works of theorists such as Francis Fukuyama, authoritative sources have claimed that the combination of a “free market economy” and “liberal democracy built on equal rights” results in the most developed form of human society. Taking into consideration that development is driven by contradictions, the above premise is true if it is accepted that no contradictions exist within or between a free market economy and liberal democracy. If, however, such contradictions do exist, the potential development of human society cannot be said to ultimately conclude with capitalism. Therefore, democratic capitalism may be the most developed and final form of capitalism, but not that of human society in general. This essay aims to clarify the meanings of free market and democracy, and their relationship. Based on the general and specific definitions of democracy, it distinguishes between the concepts of de jure and de facto equality, and analyses the impact of the most important working mechanism of a market economy – competition – on manifold inequalities. It discusses the real inequalities manifested in income and the ownership of the means of production, and also the inequalities within capital, and between capital and wage labour. By reflecting upon these inequalities, the study looks at how free market forces work towards the erosion of democracy and constrain the practical utilization of democratic institutions.

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The great challenge of our time is not a clash of civilizations, as many advocated since Samuel Huntington published The Clash of Civilizations. Nor is the world most important challenge the revival of the Cold War in the form of a renewed US-Russia confrontation or in the forms of the evils of unconventional war that the US calls “terrorism”, a generic term governments use to label any opponent terrorist. These issues are manufactured and symptomatic of capitalist countries engaged in an intense world competition for markets and raw materials. This is not very different from the world power structure during the Age of New Imperialism, 1870-1914. The great challenge of our time is social and geographic inequality that threatens not only the system of capitalism creating inequality, but the democratic political regime under which capitalism has thrived in the last one hundred years.

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Critic’s Notebook

Is the Marriage Between Democracy and Capitalism on the Rocks?

Never easy, the relationship between the vaunted political system and economic order appears to be in crisis. New books by historians and economists sound the alarm.

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By Jennifer Szalai

The documentary series “Free to Choose,” which aired on public television in 1980 and was hosted by the libertarian economist Milton Friedman, makes for surreal watching nowadays. Even if Ronald Reagan would go on to win the presidential election later that year, it was still a time when capitalism’s most enthusiastic supporters evidently felt the need to win the public over to a vision of free markets and minimal government. Today’s billionaire donors may be able to funnel money to their favored candidates without even bothering to pay lip service to American democracy, but the corporate funders of “Free to Choose” set out to make their case.

They had an enormous audience: The 15 million viewers who watched the first episode saw an avuncular Friedman (diminutive and smiling), leaning casually against a chair in a Chinatown sweatshop (noisy and crowded), surrounded by women pushing fabric through clattering sewing machines. “They are like my mother,” Friedman said, gesturing at the Asian women in the room. She had worked in a factory too, after immigrating as a 14-year-old from Austria-Hungary in the late 19th century. Friedman explained that these low-wage garment workers weren’t being exploited; they were gaining a foothold in the American land of plenty. The camera then cut to a tray of juicy steaks.

Friedman may have been happy to do his part to try to persuade the masses, but he didn’t put too much stock in democracy. He notoriously offered economic advice to the Chilean military dictator Augusto Pinochet that amounted to a brutal program of austerity. In 1967, at the height of the civil rights movement, Friedman argued that any progress made by Black Americans had to do with “the opportunities offered them by a market system” (instead of “legislative measures” that only encouraged “unrealistic and extravagant expectations”). What Friedman believed in was capitalism, or what he called “economic freedom.” Political freedom might come — but capitalism, he said, could do just fine without it.

Not so, insists Martin Wolf in his new book, “ The Crisis of Democratic Capitalism .” “Capitalism cannot survive in the long run without a democratic polity, and democracy cannot survive in the long run without a market economy,” he writes. Capitalism supplies democracy with resources, while democracy supplies capitalism with legitimacy. Wolf, the chief economics commentator for The Financial Times, worries that after an efflorescence of democratic capitalism, “that delicate flower” is beginning to wither. Most of his ire is directed at an unhinged financial system that has encouraged a “rentier capitalism” and a “rigged” economy.”

Wolf is hardly alone in noticing that the relationship between democracy and capitalism has gone haywire. He and other observers are trying to make sense of what might happen next — and, befitting our current bewilderment, they offer a range of perspectives. Some, like Wolf, hope the relationship can be repaired; others argue that the pairing has always been fraught, if not impossible.

In Wolf’s case, his anguished tone reflects the scale of his own disillusionment. Born in 1946 in postwar England, he recalls in his preface how “the world seemed solid as I grew up.” He describes the feelings of “confidence” in democracy and capitalism that flourished with the collapse of the Soviet Union. But he has also read his Marx and Engels, looking askance at their solutions while commending them for how “brilliantly” they described capitalism’s relentlessness and omnivorousness. Left to its own devices, capitalism expands wherever it can, plowing its way through national boundaries and local traditions — making it marvelously dynamic or utterly ruinous, and not infrequently both.

Yet the “democratic capitalism” that Wolf wants to preserve was, even by his own lights, short-lived. Democracy itself — or “liberal democracy” with universal suffrage, which Wolf says is the kind of democracy he means — is a “political mayfly.” Democratic capitalism ended, in his account, with the financial crisis of 2008. The former Secretary of Labor Robert Reich has offered another measure, arguing that democratic capitalism, at least in the United States, began with Franklin D. Roosevelt’s New Deal and ended with Reagan, when “corporate capitalism” took over. (There’s also an argument to be made that true democracy in the United States began only with the Voting Rights Act of 1965 .) Reich and Wolf share a deep sense of crisis, along with the adamant conviction that democratic capitalism can and should be revived.

Capitalism expands wherever it can, plowing its way through national boundaries and local traditions — making it marvelously dynamic or utterly ruinous, and not infrequently both.

The left-wing German sociologist Wolfgang Streeck stakes out a decidedly different position, suggesting that the tendency to equate “democratic capitalism” with a few decades of postwar plenty is to misinterpret a “historical compromise between a then uniquely powerful working class and an equally uniquely weakened capitalist class.” In “How Will Capitalism End?” (2016), Streeck argues that it’s not compromise but the cascade of crises following the postwar boom — inflation, unemployment, market crashes — “that represents the normal condition of democratic capitalism.” Where Wolf wistfully invokes a “delicate flower,” Streeck writes contemptuously of a “shotgun marriage.”

Less than a decade ago, Streeck sounded like a fringe Savonarola; in 2014, he published “Buying Time,” declaring he was sure that the end of democratic capitalism was nigh. When an idea that once seemed preposterous starts to look prescient, we know that something fundamental has changed.

It’s a transformation that the historian Gary Gerstle explores in his fascinating and incisive “The Rise and Fall of the Neoliberal Order” (2022). Before the New Deal order started to falter in the late 1960s and ’70s, Gerstle writes, a majority of Americans believed that capitalism should be managed by a strong state; in the neoliberal order that followed, a majority of Americans believed that the state should be constrained by free markets. Each order began to break down when its traditional ways of solving problems didn’t seem to work. Both the New Deal and its neoliberal successor took for granted that democracy and capitalism were compatible; if these books are any indication, that mainstream assumption — and even the notion of a mainstream assumption — is in tatters.

Democracy might be imperiled, but capitalism, according to Naomi Oreskes and Erik M. Conway, has obtained the status of civic religion. In “ The Big Myth: How American Business Taught Us to Loathe Government and Love the Free Market ,” the authors argue that industry groups and wealthy donors have engaged in a concerted campaign to promote “market fundamentalism” — “a vision of growth and innovation by unfettered markets where government just gets out of the way.”

Oreskes and Conway are perhaps best known for “ Merchants of Doubt ” (2010), which detailed corporate-funded efforts to protect the tobacco industry and promote climate-change denial by depicting settled science as “unsettled.” They describe their new book as a sequel of sorts — an attempt to understand the ideology that animated the figures in “Merchants,” whose terror of government regulation was so extreme that they equated environmental protections with communist tyranny.

But instead of sowing doubt, what the figures in this new book are peddling is certainty: the iffy “science” of laissez-faire economics dressed up as indisputable fact. Oreskes and Conway are historians of science, and they do an impressive job of uncovering the resources that groups like the National Association of Manufacturers and the Foundation for Economic Education put into spreading the (greed is good) word.

The main implication of “The Big Myth” seems to be that “market fundamentalism” is so horrifically egregious — enriching the few and despoiling the planet — that Americans had to be plied with propaganda to believe in it. But as Gerstle’s book shows, neoliberal ideas proved so seductive because they also happened to dovetail with the stories that Americans wanted to tell about themselves, emphasizing individuality and freedom.

Such popular support is crucial in a democracy, of course, but in “Globalists” (2018) the historian Quinn Slobodian argues that neoliberals have found ways not just to liberate markets but to “encase” them in international institutions, thereby shielding capitalist activities from democratic accountability. He observes that neoliberals were especially alarmed after World War II by decolonization, adopting a condescending “racialized language” that pitted “the rational West,” with its trade rules and property laws, against a postcolonial South, “with its ‘emotional’ commitment to sovereignty.”

Slobodian’s excellent if discomfiting new book, “ Crack-Up Capitalism ” (forthcoming in April), explores other neoliberal evasions of the nation-state: tax havens, special economic zones, gated communities — enclaves that are “freed from ordinary forms of regulation.” A new generation of swashbuckling billionaires entertain the prospect of secession, using their money to realize fantasies of escape, whether through seasteading or spaceships . The book quotes one seasteading enthusiast declaring, “Democracy is not the answer,” but merely “the current industry standard.” That person was Patri Friedman , Milton’s grandson.

Still, as much as a rarefied class might try to live in a realm beyond democracy, Slobodian says that even the most fantastical capitalist projects require a demos to function. Tech billionaires might be trying to create a world where the plebes — with their pesky demands for secure working conditions and a living wage — will be replaced by indefatigable robots that don’t have to eat anything at all (let alone a tray of juicy steaks). But for now essential workers are still humans.

“The waged service class is the easiest for the visionaries to forget and the hardest for them to live without,” Slobodian writes. “The cloud floats because the underclass holds it up. Time will tell if they drop their arms one day and make something new.”

An earlier version of this article misstated the name of one of the organizations that promoted the idea of free markets in the United States. It is the Foundation for Economic Education, not the Foundation for Economic Freedom.

How we handle corrections

Jennifer Szalai is the nonfiction book critic for The Times. More about Jennifer Szalai

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Capitalism vs. Democracy

What's the difference.

Capitalism and democracy are two distinct systems that often coexist in modern societies. Capitalism is an economic system that emphasizes private ownership, free markets, and profit-driven production. It allows individuals and businesses to pursue their economic interests with minimal government intervention. On the other hand, democracy is a political system that emphasizes the participation of citizens in decision-making processes and the protection of individual rights and freedoms. While capitalism focuses on economic aspects, democracy focuses on political aspects, ensuring that power is distributed among the people. Both systems promote individual freedom and choice, but they operate in different spheres and serve different purposes.

Further Detail

Introduction.

Capitalism and democracy are two distinct systems that have shaped the modern world in profound ways. While capitalism primarily focuses on economic organization and the distribution of wealth, democracy pertains to political governance and the participation of citizens in decision-making processes. Both systems have their own unique attributes and impacts on society. In this article, we will explore and compare the key characteristics of capitalism and democracy, shedding light on their strengths, weaknesses, and the potential synergies that can arise when they coexist.

Capitalism is an economic system characterized by private ownership of resources and the means of production, driven by profit motives and market competition. It emphasizes individual freedom, entrepreneurship, and the pursuit of self-interest. In a capitalist society, prices and production are determined by supply and demand, and the market plays a central role in allocating resources.

One of the key attributes of capitalism is its ability to foster innovation and economic growth. The profit motive incentivizes individuals and businesses to develop new products, services, and technologies, leading to increased productivity and overall prosperity. Capitalism also provides individuals with the freedom to choose their occupations and pursue economic opportunities, which can lead to upward social mobility and the accumulation of wealth.

However, capitalism is not without its drawbacks. One of the main criticisms is its potential to exacerbate income inequality. The pursuit of profit can lead to wealth concentration in the hands of a few, while leaving others behind. Additionally, unregulated capitalism may result in market failures, such as monopolies or externalities, which can have negative consequences for society as a whole.

Democracy, on the other hand, is a political system that emphasizes the participation of citizens in decision-making processes and the protection of individual rights and freedoms. It provides a framework for collective decision-making, where power is vested in the people through free and fair elections.

One of the key attributes of democracy is its emphasis on equality and inclusivity. It provides a platform for diverse voices to be heard and considered in the decision-making process, ensuring that the interests of all citizens are taken into account. Democracy also promotes transparency and accountability, as elected representatives are accountable to the people and can be held responsible for their actions.

However, democracy is not without its challenges. Decision-making processes can be slow and cumbersome, as consensus-building and compromise are often required. This can lead to inefficiencies and delays in implementing necessary reforms. Moreover, in some cases, democratic systems can be susceptible to populism and demagoguery, where leaders exploit public sentiment for personal gain, potentially undermining the principles of democracy itself.

Capitalism and Democracy: Synergies and Tensions

While capitalism and democracy are distinct systems, they often coexist and interact in modern societies. The relationship between the two can be complex, with both synergies and tensions arising.

One of the key synergies between capitalism and democracy is the potential for economic prosperity and individual freedom. Capitalism, with its emphasis on entrepreneurship and market competition, can generate wealth and economic opportunities that benefit society as a whole. Democracy, on the other hand, ensures that the benefits of capitalism are distributed more equitably and that the interests of all citizens are taken into account.

However, tensions can also arise between capitalism and democracy. The pursuit of profit in a capitalist system can sometimes clash with democratic values, such as social justice and environmental sustainability. For example, businesses driven solely by profit motives may disregard the well-being of workers or the impact of their activities on the environment. In such cases, democratic institutions and regulations are necessary to ensure that capitalism operates within ethical and sustainable boundaries.

Furthermore, the influence of money in politics can pose challenges to the democratic process. In capitalist societies, where wealth often translates into political power, there is a risk that the voices of the economically disadvantaged may be marginalized. This can undermine the principles of equality and inclusivity that are central to democracy.

In conclusion, capitalism and democracy are two distinct systems that have shaped the modern world in profound ways. While capitalism primarily focuses on economic organization and the distribution of wealth, democracy pertains to political governance and the participation of citizens in decision-making processes. Both systems have their own unique attributes and impacts on society.

Capitalism, with its emphasis on individual freedom and market competition, has the potential to foster innovation and economic growth. However, it also raises concerns about income inequality and market failures. Democracy, on the other hand, promotes equality, inclusivity, and accountability. Yet, it can be slow and susceptible to populism.

When capitalism and democracy coexist, there can be synergies in terms of economic prosperity and individual freedom. However, tensions can arise when the pursuit of profit clashes with democratic values or when money influences the democratic process. Striking a balance between the two systems is crucial to ensure a just and prosperous society.

Comparisons may contain inaccurate information about people, places, or facts. Please report any issues.

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15 Democracy and Capitalism

Torben Iversen is the Harold Hitchings Burbank Professor of Political Economy at Harvard University.

• Published: 08 December 2021
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The welfare state is at the centre of a long-standing debate about the relationship between capitalism and democracy. One view holds that democracy and capitalism are in tension with each other, and that footloose capital undermine redistribution; another view holds that democracy and capitalism are complements, and that democracy compensates for inequalities in the distribution of property and income. This chapter provides a critical review of the literature on advanced democracies and capitalism, and how the two coexist and co-evolve. It explores several topics: ( a ) approaches to the study of democratic redistribution and how democratic institutions shape distributive outcomes; ( b ) the relationship between democracy and capitalism, and in particular whether democracy is constrained by footloose capital; and ( c ) the historical origins and co-evolution of advanced capitalist democracies.

Introduction

The welfare state is at the centre of a long-standing debate in political economy about the relationship between capitalism and democracy. A standard view holds that democracy compensates for inequalities in the distribution of property and income by the extension of the welfare state. But this view raises a number of empirical and theoretical puzzles. The purpose of this chapter is to identify these puzzles and review how they have been addressed in the literature on redistribution and the welfare state.

First, if democracy empowers those who are at the lower half of the income distribution, why don’t the poor soak the rich? Second, and related, if the welfare state is all about ‘politics against markets’ (the title of Esping-Andersen’s 1985 book) how can capitalism be a viable economic system under democracy? Perhaps it cannot: a recent literature argues that footloose global capital is subverting democracy and undercutting redistribution. Third, if democracy ‘compensates’ for economic inequality, how can we explain that countries with relatively egalitarian labour markets also redistribute a lot (think Sweden), while countries with relatively inegalitarian labour markets redistribute little (think the United States)? This is an empirical puzzle that Lindert (2004) has fittingly dubbed the ‘Robin Hood Paradox’.

This chapter discusses three different approaches to the study of democratic redistribution and then considers the recent literature on capitalism as an economic system and how economic and democratic institutions relate to one another, as well as to the welfare state. The first approach assumes that democratic politics is structured around a single left–right redistributive dimension. The central issue in this literature is whether majorities can counteract market inequality and, more generally, whether ‘Who Governs’ matters. This is a key question for political economy because it goes to the heart of whether democratic politics makes a difference: do the poor ever get a chance to try to soak the rich, and how successful are they when they do? Closely related is the question of whether money in politics undermines majoritarian preferences and bends public policies to serve the interests of the rich.

The weakness of this approach is that it does not explain why politicians should limit themselves to pursuing redistribution in a single policy dimension. Where there is no such constraint, opportunities to form distributive coalitions abound, and they need not be redistributive in the usual sense of taking from the rich and giving to the poor. Work that puts coalitional politics at the centre of its analysis paints a richer and more realistic picture of the politics of redistribution. However, the cost may be theoretical intractability, and much of the coalitional literature falls into the trap of post hoc description. I will discuss two recent attempts to move beyond such description.

The third approach explains distributive politics as a function of the specific design of democratic institutions—including electoral rules and federalism. The strategy here is to substitute ad hoc model assumptions, such as unidimensionality, with ones that are rooted in careful observation of actual institutional designs. This approach moves beyond the partisan literature by explicitly considering how economic preferences are aggregated into policies, at the same time as it avoids the chaotic world of unconstrained coalitional politics. I argue that this combination has produced a vibrant research programme that helps answer the three key questions identified above: under what circumstances the poor will soak the rich, how capitalism is a viable economic system under democracy, and why equality and redistribution tend to go hand in hand.

A question not addressed in any of this literature is whether the democratic state is constrained by capitalism or vice versa. Much recent work argues that governments are increasingly hamstrung by footloose capital that flees whenever taxes are raised to fund the welfare state, or to accommodate other democratic demands for spending. Growing capital mobility has undermined the capacity of governments to tax-and-transfer.

This idea stands in contrast to the ‘varieties of capitalism’ (VoC) approach ( Hall and Soskice 2001 ), which maintains that there is no necessary contradiction between the welfare state, redistribution, and the market. Indeed, social protection and markets can be mutually reinforcing and institutional diversity in modern capitalism is seen as consistent with, even reinforced by, global market integration and foreign direct investment. Increasingly, work in this tradition also delves into the relationship between economic and democratic institutions, conceptualizing them as mutually reinforcing. Yet VoC is less equipped to explain change and does not easily account for the increase in inequality or the transition to a knowledge or service economy ( Wren 2013 ).

Some of the most recent literature on democracy and capitalism seeks to endogenize institutions, including the institution of democracy itself, by modelling these as a function of class interests. The move is tempting, and probably desirable, but it does come at a cost because, without institutional constraints, difficult issues of multidimensionality and preference aggregation re-emerge. In the concluding section, I suggest that there is a new structural-historical turn in political economy, in which the parameters for our models of institutional design are derived from the specific historical conditions that have shaped capitalism in different parts of the world. These origins may in turn help to account for current patterns of distribution and redistribution.

Democracy and Partisanship

There are two standard approaches in political economy to explaining variance in distribution and redistribution. One originates in Meltzer and Richard’s (1981) hugely influential model of redistribution, which has been the workhorse in the political economy for the past two decades. The model is built on the intuitively simple idea that, since the median voter tends to have below-average income (assuming a typical right-skewed distribution of income and high turnout), she has an interest in redistribution. With a proportional tax and lump-sum benefit, and assuming that there are efficiency costs of taxation, Downs’s median voter theorem can be applied to predict the extent of redistribution. The equilibrium is reached when the benefit to the median voter of additional spending is exactly outweighed by the work disincentives (or other inefficiencies) produced by such spending. This implies two key comparative statics: spending is higher ( a ) the greater the skew in the distribution of income; and ( b ) the greater the number of poor people who vote.

The latter suggests that an expansion of the franchise to the poor, or higher voter turnout among the poor, will shift the decisive voter to the left and therefore raise support for redistribution. Assuming that the median voter’s policy preference is implemented, democratization will therefore lead to redistribution. There is some support for this proposition (see especially Rodrik 1999 , Ansell 2008 on democracy; Franzese 2002 : chapter 2 on turnout), but the evidence that democracy increases redistribution is far from conclusive (see especially Ross 2006 ). Even if democracy does increase redistribution (and, at least for advanced democracies, the balance of the evidence supports that conjecture), it seems clear that the bulk of variance in redistribution is within rather than between regime types.

The other implication—that inegalitarian societies redistribute more than egalitarian ones—has been soundly rejected by the data (see Lindert 1996 ; Moene and Wallerstein 2001 ; Iversen and Soskice 2009 ). Indeed, the pattern among democracies appears to be precisely the opposite. As noted in the example in the Introduction above, a country with a flat income structure such as Sweden redistributes much more than a country like the United States with a very inegalitarian distribution of income. This Robin Hood paradox is a puzzle that informs much contemporary scholarship.

The other main approach to the study of capitalism and democracy focuses on the role of political power, especially the organizational and political strength of labour. If capitalism is about class conflict, then the organization and relative political strength of classes should affect policies and economic outcomes. Power resources theory focuses on the size and structure of the welfare state, explaining it as a function of the historical strength of the political left, mediated by alliances with agrarian interests and the middle classes ( Korpi 1983 ; Esping-Andersen 1990 ; Huber and Stephens 2001 ).

One key attraction of power resources theory is that it can potentially account for the Robin Hood paradox. If centre-left governments simultaneously promote pre-tax income equality (especially through investment in education) and redistribution (especially through transfers), the two will tend to go together. A complementary logic is that if strong left governments are associated with strong unions, and if the latter promote equality in wages while the former increase redistribution, redistribution will again be a complement to equality, not a substitute, as implied by the Meltzer–Richard model. This insight is nicely explained in Bradley et al. (2003) , which shows that unions are key in explaining wage distribution, while left governments are essential in explaining redistribution (see also Hicks and Swank 1992 ; Cusack 1997 ; Allan and Scruggs 2004 ; Pontusson 2005 ).

But while partisanship clearly seems to matter, power resource theory provides no explanation for why the left is strong in some countries and weak in others. This variation is only weakly related to unionization (see Iversen and Soskice 2006 ), and unionization is itself in need of explanation. Moreover, if we use a simple left–right conception of politics, there are theoretical reasons to expect governments to be centrist. Although Downs applied his argument only to majoritarian two-party systems, the median-voter theorem also applies to unidimensional models of legislative politics in multiparty systems. Essentially, no proposal or coalition can get majority support that deviates from the position of the median legislator ( Laver and Schofield 1990 ). Power resource theory does not explain why the median-voter theorem is systematically violated, and paradoxically therefore offers no account of why partisanship should matter. Even conceding that government bargaining can lead to deals that deviate from a median legislator, as is probably the case, why should governments systematically form to one or the other side of median? An important puzzle is therefore why there are stable cross-national differences in government partisanship (see Powell 2002 ; Iversen and Soskice 2006 ).

Rather surprisingly, most of the literature also fails to distinguish between the preferences of parties and the preferences of voters. Observed policy differences between left and right governments could be due to either. There are methodological fixes to this problem and regression discontinuity designs have been used to show that as-if random changes in partisanship (using the outcome of toss-up elections as the ‘treatment’) are associated with changes in policies (e.g. Petersson-Lidbom 2008 ; Caughey et al. 2017 ). Yet surely voter preferences also matter, so we need a theory of those. This is particularly important because voters have an incentive to be ‘rationally ignorant’, as argued by Downs many years ago. The lack of political information among ordinary voters has been thoroughly documented since the publication of ‘The American Voter’ in 1960 ( Campbell et al. 1960 ; see Lewis-Beck et al. 2008 for an update), and the consequences for partisan politics and redistribution are amply illustrated by Bartels (2008) . Bartels shows that ordinary people routinely vote against their own distributive interests, even when they are motivated by these interests.

Yet, against both theory and evidence, the standard political economy approach to redistribution and the welfare state assumes that people are fully informed about their interests and how these are affected by public policies. A major research agenda is therefore to endogenize the acquisition of political knowledge in models of redistribution. I have argued with David Soskice ( Iversen and Soskice 2006 ) that this involves much closer attention to the role of informal networks and the social incentives that these provide their members to be informed. There is a related literature on social capital and the welfare state (see Rothstein 2001 ; Rothstein and Stolle 2003 ), but it does not speak directly to the political knowledge issues and is not fully integrated with standard political economy approaches to redistribution.

Even when voters are informed, it is not a given that majority preferences matter for public policies. Work by Bartels (2008) , Gilens ( 2005 , 2012 ), and Gilens and Page (2014) on the United States, as well as recent work extending their approach to other advanced democracies (e.g. Bartels 2017 ; Elsässer et al. 2018 ; Peters and Ensink 2015 ), find that the affluent dominate democratic politics to the point where other income classes do not matter. This is of obvious normative concern, and it also challenges standard models of democracy and political economy, which accords a strong role to the middle class. The interpretation of the results is contested, however. Subgroup preferences are highly correlated over time (see Page and Shapiro 1992 ; Soroka and Wlezien 2008 ), and when preferences for levels of spending or redistribution are used instead of preferences for changes in policies, actual policies line up much better with the demands of the middle class ( Elkjӕr and Iversen 2020 ). This result may reflect the indirect nature of democracy, whereby parties act more as ‘trustees’ for the long-term interests of their constituents, rather than as mirrors on specific issues and policies about which most people have little information.

Worlds of Welfare Capitalism and Coalitional Politics

Distributive politics is inherently multidimensional because a pie can be divided along as many dimensions as there are political agents vying for a piece. It is therefore hard to understand why politicians should constrain themselves to contest a single policy instrument such as the proportional tax/flat-rate benefit in the Meltzer–Richard model. And when alternative tax-benefit schedules are considered, the results change in fundamental ways. In Snyder and Kramer (1988) , for example, the choice is over different—linear and non-linear—tax schedules and the majority choice is no longer redistribution that benefits the poor. The Snyder–Kramer model is itself restricted to one dimension (because it limits the choice to single-parameter schedules subject to an exogenously given revenue target), but it clearly demonstrates the sensitivity of results to the assumptions made about the structure of taxes and benefits. 1

One of the first to recognize the importance of multidimensional distributive politics was Esping-Andersen (1990) . Each of his three different ‘worlds’ of welfare capitalism is associated with a distinct tax-benefit structure. In the most redistributive (social democratic) type, progressive taxation is coupled with flat-rate benefits; in the ‘liberal’ type, means-tested benefits are targeted to the poor; while in the ‘conservative’ type, benefits are tied to income and occupation. Castles (1998) separates out a distinct Southern European cluster, which may have been converging to the continental European pattern until the late 2000s ( Castles and Obinger 2008 ), but then diverging again following the financial crisis (Chapter 48 , this volume). Esping-Andersen’s three main types have been highly resistant to change.

Esping-Andersen makes the plausible (and interesting) argument that the structure of benefits is associated with, and perhaps causes, different social divisions and political patterns: the poor against the middle class in the means-tested, insiders versus outsiders in the conservative, and public against private sector in the social democratic. To explain redistributive politics, political economy therefore has to endogenize the structure of benefits. Clearly, this task can be accomplished neither with a median voter model nor with a simple left–right partisan model. Esping-Andersen instead proposes that the answer lies in historically unique class coalitions: red–green coalitions in Scandinavia, resulting in universalism; state–corporatist coalitions in continental Europe; and alliances between middle-class and higher-income groups in liberal countries. Echoing the recent literature on path dependence ( Pierson 2000 ), Esping-Andersen then suggests that the structure of the benefit system reproduces the political support for each type (‘policy feedback’).

But neither the origins of Esping-Andersen’s three worlds, nor their stability, can be said to be explained in any conventional scientific sense, since there is no argument to preclude alternative outcomes. For example, why would it not be possible for liberal welfare states to redirect redistribution towards the middle class? Or why does the middle class not try to exclude the poor from sharing in the generous benefits of the social democratic model? Or why can outsiders not offer a deal to a subset of insiders in the conservative model that would cause the original coalition to break up? Without any explicit theory of coalitions, much of Esping-Andersen’s analysis comes across as post hoc description. What Esping-Andersen understood intuitively is that social policy is multidimensional, and multidimensionality implies coalitional politics and distinct outcomes. But to move beyond post hoc description we need a theory of why distributive politics takes on particular forms at particular times.

Modelling multidimensional coalitional politics is at the centre of several new attempts to understand distribution in democracies (see Iversen and Goplerud 2018 for a review). In Roemer’s (1998) model, people have intrinsic preferences on some ascriptive dimension, such as race or religion, in addition to preferences over redistribution. If the redistributive dimension was the only one that mattered, the analysis would essentially collapse to a Meltzer–Richard model. When a second dimension is introduced, however, and if it is sufficiently salient, what matters is the income of the median voter on the second dimension. If it is high relative to the mean, the only platform that can win is non-redistributive. The original pro-welfare coalition is thus broken apart by appeals to a non-economic dimension that splits the poor and middle. As Riker (1986) , recognized informally many years ago, the (re-)bundling of issues is a critical component of coalitional politics (see also Shepsle 2017 ), and it helps explain why the poor don’t soak the rich. 2

Alesina and Glaeser (2004) make a related argument for why racial politics may undermine redistribution. If people feel altruistic only towards people of their own race, they will not redistribute to a minority that constitutes a disproportionate share of the poor. Altruism is also important in Rueda’s (2018) account, where the rich support some measure of redistribution when they feel ‘close’ to the poor—closeness being a function of ethnic heterogeneity. Of course, if solidarity with the poor is a ‘taste’ then we need a theory of why people acquire this taste. In Lupu and Pontusson (2011) , altruism reflects socioeconomic ‘affinity’ between the poor and the middle, which is in turn a function of the skew of the income distribution (since skew determines whether middle-class income is closer to the poor than to the rich). But exactly what generates a sense of affinity is left unexplained: it could be induced by the sharing of public goods, by common interests in insurance or redistribution, or by social interaction.

Austen-Smith and Wallerstein (2006) provide a quite different story about the importance of heterogeneity. In their model, people have ‘race-blind’ preferences and are simply trying to maximize their net income. But the mere existence of a second dimension (here affirmative action) can cause a legislative coalition in favour of redistribution to break up. The reason (loosely speaking) is that the rich in the majority can offer a bargain to the minority that strengthens affirmative action, but reduces redistribution to the poor. Of course, other coalitions are also feasible, but none can be put in place that would generate as much redistribution as if bargaining took place in a single redistributive policy dimension. The net result is thus less redistribution. Again, no racism or altruism is required in this model; only income-maximizing behaviour. That is also the case in the model presented in Alt and Iversen (2017) . Here, labour market segmentation, especially in terms of unemployment risks, are correlated with racial–ethnic heterogeneity, but what causes the white middle class to favour lower redistribution is simply that they are less likely to become unemployed or poor themselves.

The Roemer and Austen-Smith and Wallerstein models are mathematically complex, but they do point to a powerful logic that applies generally to any context in which a redistributive dimension is complemented by a second or third dimension. This may explain why countries with a higher dimensionality of the policy space also tend to have less redistribution. Yet, apart from some attempts to gauge the effects of ethnic–linguistic fractionalization on spending, to my knowledge no systematic comparative test of the effect of multidimensionality on redistribution has been carried out. Alt and Iversen (2017) show that this is no easy task because of the collinearity of labour market segmentation and heterogeneity.

For welfare state research, the challenge is not merely to explain the level of redistribution, but also the different forms that welfare states take. As explained in the next section, the differentiation between the liberal and social democratic variants can potentially be accounted for in a simple three-class model, where the incentives to form particular coalitions are a function of political institutions. The structure of political parties may also matter and van Kersbergen and Manow (2009) argue that European Christian democratic parties are cross-class parties that have to satisfy very different constituencies and consequently adopt an insurance-based social model where social protection is generous, but redistribution is modest (by tying benefits to income and past contributions). This is very similar to Esping-Andersen’s description of the Christian democratic welfare state, but there is now a testable model that roots this type in a particular coalitional politics induced by the structure of the party system. In van Kersbergen and Manow’s formulation, the three worlds of welfare capitalism emerge as distinct cross-class compromises resulting from the interaction of electoral systems and Christian democracy. This suggests the importance of paying close attention to the role of political institutions, which are largely ignored in Esping-Andersen’s work.

Democratic Institutions

In the view of many scholars, focusing on the role of institutions strikes an attractive middle ground between historical research and ‘thick description’, on the one hand, and abstract formal models of distributive politics, on the other. Instead of what sometimes appear as restrictive and ad hoc model assumptions, the constraints on political behaviour are derived from observed characteristics of political and economic institutions. And instead of post hoc descriptions of behaviour, outcomes are predicted from the interaction of purposeful behaviour and institutional constraints. 3 This approach has been highly successful in explaining cross-national differences in economic policies and outcomes. In this section, I pick some prominent examples that either focus on democratic institutions (this section) or economic institutions (the next section). 4

I begin with a discussion of the role of the electoral system because it is a feature of democracies that varies a great deal and covaries closely with government spending, redistribution, and income equality ( Persson and Tabellini 2003 ). This covariation has become the focus of intense scrutiny in recent work in comparative political economy.

Persson and Tabellini explain the association with reference to the incentives of politicians to either concentrate benefits on pivotal electoral districts or spread them out on broadly defined groups or classes. In single-member plurality systems, they argue, if middle-class swing voters are concentrated in particular districts, parties have an incentive to completely ignore other districts that are ideologically predisposed in one way or the other. These districts are ‘safe’ and therefore not worth fighting over. Money instead flows to swing votes in middle-class districts. In proportional representation (PR) systems, where all candidates are elected on national lists, by contrast, there are no safe districts, so politicians cannot ignore the loss of support among other groups if all transfers are concentrated on the middle class. The result is greater dispersion of spending across classes or more spending on broad public goods. The analogy to universalism in Esping-Andersen’s discussion of the social democratic welfare state is obvious, although the notion of geographically targeted spending in single-member district systems has no obvious correspondence in Esping-Andersen’s typology.

One problem with the Persson-Tabellini account is that PR systems tend to spend more on both transfers and public goods. To explain this, Persson and Tabellini point to a ‘second-order effect’ of PR, namely that PR systems tend to have more parties and be ruled by multiparty governments. If each party wants to spend on its own group (so that the space is multidimensional), this can lead to a common pool problem with excessive spending (see also Bawn and Rosenbluth 2002 ; Crepaz 1998 ).

But the more important consequence of having multiparty systems may be that they lead to a distinct form of coalitional politics (assuming that no single party has an absolute majority). In Milesi-Ferretti et al. (2002) , for example, there are three candidates representing either ‘districts’ or classes, and governments are formed through a coalition between two candidates. As in the Persson-Tabellini model, majoritarian electoral systems with single-member districts encourage geographically targeted spending, but this bias is reinforced by coalition bargaining because voters in each district will vote for politicians with extreme preferences for targeted spending towards their district—a logic that may also apply to federalist systems. In PR systems, on the other hand, classes will elect leaders who only care about transfers to the class they represent, neglecting local public goods. Even though the mix of spending is inefficient in both systems, the model helps explain why spending takes such different forms in different countries.

The redistributive consequences of the Persson-Tabellini and Milesi-Ferretti et al. models are ambiguous. In the Iversen and Soskice (2006) class coalition model, on the other hand, they are at the core of the institutional argument. In this model, class parties either form coalitions with each other (as in multiparty PR) or they are themselves coalitions of classes (as in two-party majority rule). In the former case, the parties representing the poor and the middle class have an incentive to ally to tax the rich (as opposed to the middle and the rich taxing the poor), and this leads to a centre-left partisan bias. In two-party majoritarian systems, on the other hand, parties are themselves coalitions and, while both will appeal to the middle class, the median voter will worry about post-election deviations from this platform. Assuming that the right cannot engage in regressive redistribution, incomplete platform commitment puts the median voter at risk and gives the centre-right an electoral advantage. The implication is that partisanship and redistribution systematically covary with electoral system. Unlike power resource theory, which treats partisanship as an exogenous variable, redistribution in the Iversen–Soskice model is a function of partisan coalitions induced by the electoral system. And unlike the Meltzer–Richard model, the possibility of partisanship emerges because spending can be targeted and therefore is multidimensional.

Another democratic institution that has generated intense scholarly scrutiny is federalism. Much of the research in this area originates with Brennan and Buchanan’s (1980) argument that competition between local governments for mobile sources of revenue undermines the ability of governments to impose ‘excessive’ taxation. Coupled with the potential ability of states to secede, which restricts the ability of central governments to exploit member states, federalism may also constitute a credible commitment to property rights—what Weingast (1995) calls ‘market-preserving federalism’. Viewed from the left, this logic suggests that federalism may undermine the welfare state and lead to underprovision of social welfare, or even a ‘race to the bottom’ ( Pierson 1995 ).

A related argument is that federalism makes it harder to pass new legislation because it has to be agreed to at different levels of government and in two legislative assemblies at the federal level ( Scharpf 1988 ). The implication is a status quo bias, which has been argued to slow down the expansion of the welfare state ( Cameron 1978 ; Castles 1998 ; Huber and Stephens 2001 ). But while federalism does appear to be associated with smaller governments, there is in fact a striking amount of variance across federalist states ( Obinger et al. 2005 ; Castles et al. 2005 ). Swiss and US federalism seems to produce tax competition and low spending, whereas German or Austrian federalism is linked to cross-regional coordination and redistribution.

To account for this variation, Rodden (2003) has proposed to distinguish between federalist systems with different fiscal institutions. If local spending is locally financed, tax competition puts a damper on spending, but if local spending is financed through central or intergovernmental grants, local politicians have little incentive to contain spending (see also Diaz-Cayeros 2006 ). Revenue sharing may be seen as a source of common pool problems or it may be seen as a method of reducing the power of those with mobile assets and empowering (central) governments to pursue redistribution. Whatever the normative perspective, if there are two different types of federalism, then a key issue is why some governments adopted one form rather than the other ( Wibbels 2003 ). Obinger et al. (2005) suggest that the answer is found in the original distribution of jurisdictions across government levels. Only in countries such as Austria and Germany, where the federal government initially assumed large social policy responsibilities, and where federal institutions facilitated coordination and revenue-sharing, did federalism permit significant welfare state expansion.

By anchoring model assumptions in the rich details of actual political institutions, the new institutionalist literature enables the coupling of formal reasoning with the realism of inductive research. It reduces the indeterminism of democratic policymaking and suggests promising ways to endogenize partisanship, coalition formation, and styles of policymaking. Our understanding of redistribution and welfare has been greatly advanced in the process. But by highlighting the critical importance of institutional detail, one cannot help but wonder whether the real task is not the explanation of the institutions themselves. I return to this question below. But first, I turn to another successful branch of institutionalism that focuses on modern capitalism as an economic system with distinct implications for distribution and the welfare state.

Varieties of Capitalism and Rising Inequality

As noted above, it is common to portray democratic capitalism as a system in which markets allocate income according to efficiency, while governments redistribute income according to political demand. This suggests a convenient intellectual division of labour between economists and political scientists, but this view is based on a neoclassical view of the economy that few believe in today. Instead, the dominant approach to the study of capitalism as an economic system builds on new institutional economics and is known as the ‘varieties of capitalism’ (or VoC) approach ( Hall and Soskice 2001 ). Just as democracy has been shown to divide into institutional subspecies, so has capitalism. As I discuss at the end of this section, there is in fact a close empirical association between political and economic institutions for reasons that are increasingly understood.

The VoC approach assumes that economic institutions are designed to help firms and other economic agents make the best use of their productive assets ( Hall and Soskice 2001 ). As argued by Williamson (1985) , North (1990) , and others, when an economy is characterized by heavy investment in co-specific assets, economic agents are exposed to risks that make market exchange problematic. 5 A precondition for such an economy to work efficiently is therefore a dense network of institutions that provide information, offer insurance against risk, and permit continuous bargaining and impartial enforcement of agreements.

Another central feature of the VoC approach is the idea of institutional complementarities where the effectiveness of one institution depends on the design of another. A precursor for this idea is Lange and Garrett’s (1985) congruence model, in which redistributive policies only produce good economic performance where unions are centrally organized. The VoC approach takes the idea much farther and argues that all major institutions of capitalism are complementary to each other: the industrial relations system, the financial and corporate governance system, the training system, and the innovation system.

The VoC argument suggests a very different explanation for the welfare state than power resources theory. Mares (2003) , for example, argues that companies and industries that are highly exposed to risk will favour a social insurance system in which cost and risk are shared, leading employers to push for universalistic unemployment and accident insurance. Although low-risk firms will oppose such spending, it is remarkable that universalism has been promoted by groups of employers, since the literature associates it so closely with policies imposed on employers by unions and left governments. Estévez-Abe et al. (2001) and Iversen (2005) further argue that social protection (including job protection, unemployment benefits, income protection, and a host of related policies, such as active labour market programmes and industry subsidies) encourages workers to acquire specific skills, which in turn enhances the ability of firms to compete in international markets. The welfare state is thus linked to the economy in a manner that creates beneficial complementarities. This may help to explain the lack of evidence for the deleterious effects of social spending on growth (see Lindert 1996 ; Pontusson 2005 ). In some institutional settings, generous social spending may indeed impede performance, but the point of the VoC story about the welfare state is that such spending tends to occur only in settings where it complements the operation of the production system ( Iversen 2005 ).

A common critique of VoC is that it is static and cannot account for the transition to a new and much more inegalitarian, globalized knowledge economy based on services ( Wren 2013 ). In this new environment, do democratic governments still have the autonomy and capacity to tax and spend in response to democratic demands? During the past two decades, a deep pessimism about the future of democratic capitalism has taken hold, both in the press and in the academic literature. It is not hard to understand the triggers for this pessimism: the rise of the populist right in western Europe, Brexit in the United Kingdom, and the election of Donald Trump in the United States. This has happened against the background of starkly rising inequality and the worst economic crisis since the 1930s, which linger in the form of low growth rates (even as full employment is returning). Prominent scholars such as Streeck ( 2011 , 2016 ), Piketty (2014) , and Rodrik ( 1997 , 2018 ) argue that these troubles are symptoms of democracy being subverted by increasingly footloose capital, which undermines the capacity of governments to redistribute and regulate the economy.

Yet, there are theoretical reasons to be sceptical of these arguments. Advanced capitalism is based on investment in skill-intensive production, and such production is rooted in local skill clusters (mostly in the successful cities) that are complemented by dense co-located social networks, which are very hard to uproot and move elsewhere ( Iversen and Soskice 2019 ). In this perspective, trade and foreign investment reinforce local specialization and raise the dependence of multinational capital on highly location co-specific assets, most importantly highly skilled labour. Intense market competition, especially in globalized markets, also makes it hard for business to coordinate politically. Globalization may therefore not have any effect on the capacity of democratic governments to be responsive to popular demands.

At the same time, it is important to keep in mind that democracy is not a guarantee of equality. The transition to a knowledge economy has created stark inequalities between skill groups (what economists refer to as skill-biased technological change), as well as between the successful cities and the declining small towns and rural areas. In the Fordist industrial economy, strong complementarities existed across skill groups, with skilled and semi-skilled workers being complements in production, as well as across geographical space, as outlying areas were ‘feeder towns’ for the urban industrial machine. As these complementarities break down, as they have over the past forty years, solidarity is also harder to sustain politically. Lack of compensation to the losers of the new economy may not be lack of state capacity, but rather lack of political support among the educated middle classes. And this lack of class–class solidarity may fuel a populist backlash ( Iversen and Soskice 2019 ). This is a debate that will continue for some time, and VoC is not well placed to settle it because the theory is anchored in a fairly static analysis of the industrial economy. The service economy raises new and different questions about the politics of inequality ( Wren 2013 ).

Another underexplored topic in the VoC literature is the relationship between economic and political institutions. It is striking, for example, that the division into liberal and coordinated market economies is almost perfectly collinear with the division into PR and majoritarian electoral systems. One possible explanation, which echoes Katzenstein’s (1985) work on corporatism, is that PR promotes the representation of economic agents with co-specific assets in the legislature and its committees. Such representation facilitates compromise over regulatory policies in which there is a strong element of common interest. Since co-specific investments are less prevalent in liberal market economies, the right has a strong interest in preventing the redistribution that is associated with PR (as described in ‘Democratic Institutions’ above). Majoritarian systems instead encourage parties to elect strong leaders in order to convince the median voter that they are not beholden to special interests or to ‘excessive’ redistribution (see Cusack et al. 2007 ; Iversen and Soskice 2009 ).

These conjectures will have to be corroborated through historical research, since the institutional configurations we observe today are the result of developments in the late nineteenth and early twentieth centuries. This observation in fact applies to the entire institutionalist approach to political economy. The more successful political economy is in explaining economic policies and outcomes with reference to the institutional design, the more pressing it is to explain why one design was chosen rather than another ( Thelen 1999 ; Pierson 2000 ). But the question then is how we can approach this task without being overwhelmed by the complexity of institution-free politics. In the concluding section, I ask whether the answer may lie in a new form of structuralism.

Conclusion: Towards a New Structuralism?

A decade ago nearly all comparative political economists would have called themselves institutionalists. Today, an increasing number of scholars are convinced that the only way forward is by going back—back to the origins of institutions and the socio-economic and political conditions that gave rise to them. The questions that are being asked by these scholars are fundamental. Under which structural-economic conditions do autocracies commit to democracy and redistribution ( Acemoglu and Robinson 2005 ; Boix 2003 )? What are the origins of modern skill systems and the labour markets and social systems with which they are associated ( Thelen 2004 ; Iversen and Soskice 2009 )? What accounts for differences in the structure of social programmes ( Mares 2003 ; Swenson 2002 )? What are the origins of more or less distributive forms of federalism ( Wibbels 2003 ; Castles et al. 2005 )? And what accounts for electoral institutions that are closely associated with left governments and redistribution ( Boix 1999 ; Cusack et al. 2007 )? More recently, what are the causes and consequences of the transformation of democratic and economic institutions that we now associate with the new knowledge economy ( Wren 2013 ; Iversen and Soskice 2019 ).

Rogowski and Macray (2003) take the radical position that many of the institutional effects that have been documented in painstaking detail by decades of institutional research are in fact epiphenomenal to the structural conditions and interests, especially economic inequality, that gave rise to them. If this is true, it puts a premium on understanding the ‘pre-strategic’ policy preferences of agents and the circumstances that determine how they are ‘aggregated’. New structuralism (to distinguish it from Marxist structuralism, structural functionalism, and other uses of the term) seeks to explain the design of democratic and social institutions, and the coalitions that underpin them, with reference to the structural conditions in the early formation of markets and states.

Examples include Acemoglu and Robinson’s (2005) focus on the distribution of income and the size of the middle class in explaining emergence of democracy, or Iversen and Soskice’s (2019 , chapter 2) emphasis on the organization of capitalism at the dawn of the industrial revolution in explaining distinct paths that advanced countries took to democracy in the early twentieth century. Martin and Swank (2008) , switching the focus of the causal story, suggest that the early structure of democratic party systems shaped the subsequent organization of capitalist production. In a similar vein, Obinger et al. (2005) suggests that the interaction of early democratization and the role of the central government in social policy formation determined the form that federalism would later take, including its distributive consequences.

These examples do not add up to a single coherent approach to the study of capitalism and democracy. They do, however, highlight the importance of understanding the historical origins of the economic, political, and social institutions that shape distributive politics through time. The recent historical turn in political economy highlights the importance of identifying the structural attributes of economies and states, and the agents that populate them, in order to build models of institutional design that have explanatory, as well as descriptive, power. Similarly to the institutionalist project that has matured over the past four decades, the success of the new structuralism will depend on combining carefully identified historical constraints with rigorous theorizing. By treating institutions as causal bridges to the past, as opposed to simply a point of departure, we may gain a deeper understanding of the pattern of distribution and redistribution that is observed in contemporary democracies.

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The winner in the Snyder-Kramer model is the middle class—a result that is echoed in the multidimensional model (using probabilistic voting) by Dixit and Londregan (1996) .

The model is in fact more complicated because, once again, there is no equilibrium with majority voting in a multidimensional space. Roemer solves this problem in two alternative ways. In the first formulation, one party gets to select its platform before the other party, producing a Stackelberg equilibrium. In another, different factions of both parties must all agree to the policy platform, and this reduces the feasible policy space to a single point.

‘Institutions’ are defined broadly as the ‘rules of the game’ ( North 1990 ).

These examples are meant to be illustrative. I do not pretend to offer an exhaustive discussion of the institutionalist literature (see also Chapter 18 ).

  Polanyi (1944) is an important precursor for many of these arguments.

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Capitalism Vs Democracy Differences and Similarities

The capitalism vs democracy essay aims at making comparisons and contrasts between capitalism and democracy . The aim of the article is to explain the two concepts as well as their pros and cons to further facilitate the understanding of their similarities and differences. Before going to capitalism vs democracy, let us look at the two concepts.

Table of Contents

What is Capitalism?

When we talk of capitalism , it means an economic system in which private individuals are in full ownership and control of all means of production (trade and industry). It is one of the major economic systems that exist in most economies of the world. All capital resources or capital goods/ factors of production are owned by private individuals. Here, the determinant of the level of the production of goods and services as well as their prices is the forces of demand and supply .

A capitalist economy is a free market economy, also known as the laissez-faire economy. Private individuals determine the basic economic problems in society under this economy since they own and control all means of production.

Capitalism pros and cons

1. advantages of capitalism, efficient resource allocation.

Resource allocation is more efficient in the capitalist economy due to the existence of competition. This happens because companies try to utilize their resources such that they increase productivity and quality. They adopt strategies to cut down costs while they increase productivity and competitiveness. This is because a firm will certainly go out of business if it is unproductive.

Utilization of available resources

Capitalism has a great advantage in terms of optimal utilization of available resources. Firms try to engage their scarce resources in an efficient and economical way. By being strategic in this aspect, efficiency minimizes the wastage of resources. Every producing firm gives in its best in maximizing profit while minimizing cost. This result is possible only through the usage of resources in an economic way.

Financial incentives

In capitalism, the incentives to be more creative and innovative exist. Firms get a higher level of motivation to work hard. In this case,  firms embark on research and development With the purpose of facilitating expansion. The essence of this is to avoid going out of business since it is necessary to survive in the competitive market. In capitalism, every firm competes for the consumer’s money and patronage by improving product quality. So, firms take risks in setting up a business . In this economy, large financial rewards follow suit.

Minimal discrimination

This economic system is a tool for bringing people together and this helps to overcome discrimination. This goes further to encourage domestic and international trade . A sensitive outcome of this is that it works towards breaking down trade barriers. The system brings countries together thereby ignoring racial and tribal differences. Capitalism drives haters towards working on their hatred.

Raising the standards of living

Capitalism helps in improving the standard of living through the reduction of poverty. Obviously, economic growth gives rise to an improved standard of living. This is traceable to poverty reduction. When a country’s GDP grows, poverty reduces, and this is the result of production and entrepreneurship .

Consumer choices

There is freedom of choice. By implication, individuals can choose what to buy. Another area of choice is in the area of occupation and employers. Choices give rise to competition which triggers firms to improve in their product quality.

Dynamic efficiency

Capitalists/producers are highly responsive to the changes in  consumer behavior , choices, tastes, and preferences. They respond swiftly to new consumer trends, prompt response to the tastes and preferences of consumers.

Minimal government control

In a capitalist economy, there is minimal government control. Here, if the government tries to control a capitalist economy, problems will result. Some of the problems will include corruption, poor information, and a lack of incentives. By implication, a corrupt government is of great hazard to an economy. In this aspect, government control does more harm than good. This has a very high tendency of eroding an economy.

Self-interest

In this economy, individuals can pursue their self-interests and satisfaction. You have the right to do whatever you desire without experiencing any form of civil and political pressure . The emphasis here is on the idea that people’s actions are beneficial to the entire society. Humans are the most productive factors, they earn money which fetches them both political and financial freedom.

Competition

As individuals are free to own and control means of production, they can study the demands of consumers. This enables them to produce commodities that satisfy their wants. Businesses in the market compete with one another for consumer patronage and money. This happens through the growth of demand.  The positive impact of competition is that it motivates firms to produce more goods and lower their prices. This then calls for more labor force and better wages for the labor.

Invention and innovation

Through the capitalist idea, firms get more encouragement to come up with new business ideas. Efficiency in the market moves progressively.  Finding new business ideas as well as applying them to its production processes facilitates rapid expansion, greater employment opportunities, and a greater level of income. Firms that are innovative enjoy the benefits of their research as they create things that never existed.

2. Disadvantages of capitalism

Higher-income and wealth inequality.

In the capitalist economy, businesses tend to care less about the less privileged and the disadvantaged. The high rate of competition deviates the focus of people from societal benefits. The effect of this is a higher level of income inequality. Here, people’s priority bases on self-interest rather than societal interests. This, in turn, amounts to consumers exploitation by business firms.

Economic instability

It can lead to economic instability. When the economy expands, there is joy while the reverse is the case during economic contraction. This contraction may amount to an economic recession which will increase the unemployment rate. Wealthier people have more immunity to this period because they can go back to their wealth reserve. The system does not always stay on the growth pattern as some segments enjoy growth while others do not.

Fewer advantages for the low-skilled people

People who do not have sufficient skills will have no place to exist in a capitalist economy. This system requires firms and individuals to remain competitive. Based on this theory, social welfare and security programs do not seem to exist. This implies that any individual who is not able to contribute will face so many life-threatening experiences. Everyone pursues their own interests above others.

Requirements for successful consumption

Without consumers spending their money, the capitalist economy will not be effective. People will struggle to survive if consumers decide to save for future purposes. For capitalism to survive, it requires successful consumption.

Consumerism and environmental costs

For a capitalist economy to be successful, there has to be endless production. This production has led to environmental disasters thereby raising questions pertaining to sustainability. The long-term effect of capitalism is environmental pollution as well as climatic changes in production processes. The depletion of natural resources takes place in the long run thereby lowering the overall quality of life in society.

Greed while seeking profit

The profit comes first before every other thing. The emphasis and focus on profit cause producers to compete among themselves. The focus and emphasis on this subject matter make companies sell their products at the highest possible price. As they do this, they try to keep their costs low. Obsession with profit heightens the level of income inequality. The masses seem not to enjoy equal opportunity. The greed factor amounts to a high level of consumer exploitation. Also, some firms dominate the market thereby eliminating smaller firms. They charge the price they wish to thereby exploiting consumers.

Workforce limitations

In theory, factor inputs should be able to transit from unprofitable to profitable businesses. Unfortunately, this does not work for the labor force. Business fluctuations have a more negative impact on the labor force and this gives rise to a high unemployment rate. It is usually difficult for people to secure full-time jobs unless during an economic boom.

Neglect of social benefits

The system ignores the provision of social benefits since it yields no profit to capitalists. As a major feature of capitalism, the profit motive is the main factor. The government usually steps in to provide social benefits due to this deficiency.

Class struggle

Under capitalism, class struggles and conflicts are inevitable. Labor unrests such as strikes and riots exist in the system. Conflicts usually exist between employers and employees especially when wage earners face exploitation from capitalists.

What is democracy?

Democracy is a system of government in which the entire citizens or eligible ones have the right to carry out direct votes on issues or elect someone to decide on their behalf. In other words, democracy is the government of the people, for the people, and by the people. Due to the fact that everyone cannot have a hand in the running of a country, the masses vote for a representative that will take action on their behalfs such as the members of the house of representatives and councilors.

Almost everyone believes that democracy is the best available system of government. This is because everyone is free to have a voice and air out their opinions. A democratic government is not coercive and dictatorial in nature. In this governmental system,  public opinions are present. Under this form of government, the abuse of human rights is unacceptable.

Democracy pros and cons

1) advantages of democracy, personal involvement with the government.

Democracy provides people with the opportunity of having personal involvement with their government. Individuals can decide their fate since a democratic government is under the control of the people. This means that people have the right to choose to vote in the manner in which their morality dictates. Every cast of votes is a chance to express personal opinions. An agreement exists in a democratic government.

Minimizes the issue of exploitation

Democratic structures work towards reducing the issues of exploitation. This is because of the individuals that gain votes into powerful positions. Under democracy, there is an equal distribution of authorities in the system. Checks and balances exist to make sure that no single person gains supremacy over legislation. it does not allow officials from ignoring the needs of the people. Everyone has the opportunity to pursue their personal gains.

Positive equality

A democratic system of government encourages equality in a positive manner, it offers every vote an equal amount of weight in the course of an election. Every individual has the opportunity to cast a ballot without any form of judgment while registering for this process. This provides an opinion regardless of one’s economic and social status. In essence, every YES or NO counts as one whether you are rich or poor, possess an asset or not. One word that democracy and socialism have in common is equality.

Faster economic growth

A  democratic government tends to grow an economy faster than other systems of government. The general public can pursue whatever they want.  There are legal barriers to prevent one individual from hurting another even as freedom exists. Democracy influences everyone’s work with regard to fruitfulness as everyone employs their strengths.

2) Disadvantages of democracy

May be ineffective.

If voters do not take time to educate themselves on decisions regarding government, democracy will not be effective. There is usually no direction regarding how voters are to approach their responsibility.

Dependent upon the will of the majority

Democracy tends to be unfair to the minority as the majority carries the vote. The majority are better off while the minority are worse off. Minorities tend to feel as though their votes do not really count for something.

The cost of democracy unrealized

One of the least cost-efficient systems of government that exist today is the democratic government. The high cost involved is a factor that many people have not realized that it exists. The time and finances required in conducting an election are so costly. Even local and regional elections cost a lot. It is important for people to have power in their voices even as the government uses the taxes they pay for this opportunity.

More time to implement changes

Democracy requires more time for a change to take place. The processes of implementing changes tend to slow down such that it can take many years. This is because a referendum must go to the voters. All decisions must undergo a review potentially. Because of this, there is a certain level of uncertainty.

The risk of empty promises

The goal of every politician is to receive the highest number of votes. This gives rise to empty promises. An election candidate can make so many promises that will never be fulfilled once he gets into office. Under this system of government, empty promises are common.

Voters must accept an entire mandate for single issues

Unless a direct structure of democracy is in place, voters will always face compulsion to accept an entire manifesto to carry out votes on issues that are critical to their needs. Instead of the people/voters having a candidate who will truly represent them, they have no other choice than to pick the platform closest to their stance.

Capitalism vs democracy

Capitalism vs democracy similarities.

The capitalism vs democracy similarities explains the areas in which capitalism and democracy are similar. Though they represent two different concepts, it is important to note some similarities that exist.

Both capitalism and democracy provide for the freedom to make choices between alternatives. Capitalism empowers members by giving them the freedom to make choices with regard to what to produce or purchase. Also, democracy offers freedom of expression to the people. Freedom to make choices is a high moral principle.

Competition exists in both capitalism and democracy. Capitalist firms compete for the consumer’s money and patronage. Also, election candidates compete for the votes of the masses and the masses compete for their personal interests through their votes.

Tendency of immorality

Under capitalism and democracy, immorality tends to exist. While capitalists abuse monopoly power leading to exploitation, candidates abuse their power through some acts like corruption and lies. Election rigging is another form of immorality under the democratic form of government.

Effect on the economy

Both capitalism and democracy have effects on a country’s economy. These effects can take different forms, either positive or negative

Differences between capitalism and democracy

Capitalism vs democracy chart.

The capitalism vs democracy chart summarizes the differences that exist between capitalism and democracy.

Key differences between capitalism and democracy

Let us look at capitalism vs democracy differences in the areas below;

Capitalism refers to an economic system in which private individuals own and control trade and industry as well as all means of production. Democracy on the other hand is a system of government in which the entire citizens or eligible ones have the right to vote directly on issues or elect someone to make these decisions on their behalf.

While capitalism is an economic concept that emphasizes private ownership and control of all means of production, democracy on the other hand is a political concept that emphasizes equal rights of the masses to involve in political participation through the casting of votes.

While capitalism has to do with the private sector, democracy basically has to do with the public sector.

Capitalism is characterized by class distinctions where we have the rich and the poor. On the other hand, democracy has the feature of equal rights. The system of government does not divide the class of people into rich and poor. In other words, democracy does not divide society into classes as it is in the case of capitalism.

Capitalism focuses on individual growth while democracy focuses on the growth of the public as well as the combined growth of the government and society.

Economic growth

Under capitalism, the economic growth of the state is absent while it is present under the democratic system of government.

Benefits of capital

Under socialism , the benefits of capital are to the business owner while under democracy, capital is meant to benefit the public and society.

Priority on societal needs

The capitalist system places more priority on the freedom of individuals. Democracy places more priority on the interests of society above individual interests.

Frequently asked questions

What is the difference between capitalism and democracy.

Firstly, capitalism is an economic concept while democracy is a political concept. Also, while capitalism is a private sector, democracy is a public sector. Capitalism focuses on individual growth while democracy focuses on public and societal growth. While capitalism benefits the business owner only, democracy benefits the general public/society. Capitalism places more priority on individual needs than societal needs while the reverse is the case under democracy.

Is the United States a democracy or a capitalist country?

The united states s a capitalist country, highly entrepreneurial with large industries.

Is capitalism a form of government?

Capitalism is an economic system, not a form of government. It is an economic system in which private individuals are in full ownership and control of all means of production.

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