Are Democracy and Capitalism Incompatible? – Economics Essay

Are Democracy and Capitalism Incompatible? – Economics Essay
Due to modernization, democracy and capitalism have gone hand in hand, and are therefore often seen as inevitably linked. “Democracy and market capitalism are like two

persons bound in a tempestuous marriage that is driven by conflict and yet endures because neither partner wishes to separate from the other.” (Dahl, 1998: 166). Democracy essentially means rule by the majority of people and in Western countries democracy has come to mean representative democracy, where representatives are elected through free and fair elections and universal suffrage exists. Capitalism can be defined the following way: “A distinct form of social organization, based on generalized commodity production, in which there is private ownership and/or control of the means of production” (McLean and McMillan, 2003: 62). Modern representative democracy and market-capitalism both belong to the wider tradition of liberalism and can therefore be seen as embracing some common core principles, such as individualism. If such similarities exist, why are democracy and capitalism sometimes seen as incompatible? In this essay I intend to examine arguments from both sides, for and against the incompatibility of democracy and capitalism, using various academic readings. Finally I will come to a conclusion on democracy’s and capitalism’s incompatibility.

Arguments for: Democracy and capitalism are incompatible

Bowles and Gintis see democracy and capitalism as contrasting each other and visualize the establishment of a democratic social order and the elimination of the institutions of capitalist economy (1986: 3). This, in their view, can lead to an ideal society. The problem with the modern capitalist societies is that economic theory prevails over political theory while this should not be so. Also, democracy and capitalism seem to emphasize a completely different set of values: “… the one is characterized by the pre-eminence of economic privilege based on property rights, the other insists on the priority of liberty and democratic accountability based on the exercise of personal rights” (Bowles and Gintis, 1986: 3).

Robert Dahl lists three reasons why, in his opinion, market-capitalism has harmful effects on democracy:
1. “Democracy and market capitalism are locked in a persistent conflict in which each modifies and limits the other.” (1998: 173)
2. “Because market-capitalism inevitably creates inequalities, it limits the democratic potential of polyarchical democracy by generating inequalities in the distribution of political resources.” (1998: 177)
3. “Market-capitalism greatly favors the development of democracy up to the level of polyarchical democracy. But because of its adverse consequences for political equality, it is unfavorable to the development of democracy beyond the level of polyarchy.” (1998: 178).
He finds market-capitalism and democracy being interlinked because laissez-faire capitalism per se does not work and government intervention in the form of regulatory laws and policies is required to ensure a working market economy. The need for this stems from what he sees as economy overriding morality and politics: economic self-interest-based growth does not seek for common good but inevitably inflicts harm on some people. “The historical record is clear: in all democratic countries, the harm produced by, or expected from, unregulated markets has induced governments to intervene in order to alter an outcome that would otherwise cause damage to some citizens.” (Dahl, 1998: 175). However, so far his argument seems to prove that democracy and capitalism in fact need each other. How are they then incompatible? Dahl sees the harmful effect that market-capitalism has on democratic institutions. By creating inequalities, it leads to the creation of political elites and a polarization in the distribution of power. Economic inequalities that market-capitalism fosters go on to produce political inequalities. Market-capitalism also prevents the development of democracy, as Dahl states in point three. So even if he does not seem to argue for full incompatibility, he sees the relationship between market-capitalism and democracy as essentially harmful.

Green argues strongly in favor of the incompatibility of capitalism and democracy. Capitalist societies have three components: social class, division of gender, race and ethnicity, and formal separation between decision-making elites and all other citizens (1985: 13). This has already been pointed out by Dahl emphasizing capitalism’s tendency to create political elites. This social division of labor, put in place by capitalism, inevitably results in the development of a similar political structure, which proves harmful to democracy. “Insofar as the control of money and property enables us to buy or command other people’s time and skills, inequalities in the distribution of economic capital are virtually reproduces in the distribution of political capital” (Green, 1985: 14). This leads to the decline of political legitimacy and possibly even the alienation of voters.

Arguments against: Democracy and capitalism are not incompatible

Bealey argues that even if according to Schumpeter democracy and capitalism were connected, no sufficient evidence exists to prove this. Common systemic features are shared between the two, such as individualism and rational choice, and “… there is some parallel between the ideal model of market capitalism and the ideal model of democracy; and there is some parallel between the way the market really operates and the practical working of a democratic political system” (Bealey, 1993: 212). However, this is not enough evidence to prove that a causal connection exists. Bealey sees democracy and capitalism as having inter-action though and therefore being compatible. Democratic governments regulate and restrict business activities and vice versa, the governments need the advice from businesses in order to do this. It is conceivable that non-democratic capitalism is as common as democratic capitalism, but democracy’s and capitalism’s compatibility is proven by Bealey: “Democracy and markets are concepts that meet with so much approval, as in the USA, for example, that they have come to be regarded as part of ‘our way of life’, the natural order of things.” (1993: 222). So surely, if they are seen as the natural order of things, there must be something in that combination that truly works.

In the previous section Robert Dahl made some remarks pointing towards the incompatibility of democracy and capitalism. But he also points out two reasons why market-capitalism in fact favors democracy:
1. “Polyarchical democracy has endured only in countries with a predominantly market-capitalist economy; and it has never endured in a country with a predominantly non-market economy.” (1998: 166).
2. “This strict relation exists because certain basic features of market-capitalism make it favorable for democratic institutions. Conversely, some basic features of a predominantly non-market economy make it harmful to democratic prospects.” (1998: 167).
By polyarchical democracy, he refers to modern representative democracy. Capitalism favours the evolution of representative institutions and citizen participation. Also economic growth, towards which capitalism aims, is favourable to democracy. “By cutting acute poverty and improving living standards, economic growth helps to reduce social and political conflicts.” (Dahl, 1998: 167-8). Dahl goes on to point how economic growth supports education and fosters literate and educated citizenry (1998: 168) which is all the better for democracy and lessens social and political conflicts. Market-capitalism also avoids the need for a powerful, even authoritarian central government, by decentralizing many economic decisions (Dahl, 1998: 168), however this does not mean that non-democratic capitalist systems do not exist and Dahl points out that “there appears to be no correlation between economic growth and a country’s type of government or regime” (1998: 170). Capitalism does increase the need for democracy though.

Rueschmeyer, Stephens and Stephens see capitalism and democracy being strongly linked. “The unrestrained operation of the market for capital and labor constitutes the material base for democracy. Democracy is the characteristic political form of capitalism.” (1992: 1). Economic development leads to political freedom and democratic participation, and also furthers the growth of the civil society. “Capitalist development is associated with democracy because it transforms the class structure, strengthening the working and middle classes and weakening the landed upper class.” (Rueschmeyer, Stephens and Stephens, 1992: 7).


Bealey, F. (1993): Capitalism and Democracy, in European Journal of Political Research. Vol. 23, no 2.

Bowles, S. and Gintis, H. (1986): Democracy and Capitalism. London: Routledge & Kegan Paul.

Dahl, R. (1998): On Democracy. New Haven: Yale University Press.

Green, P. (1985): Retrieving Democracy. London: Methuen.

McLean, I. and McMillan, A. (Eds) (2003): The Concise Oxford Dictionary of Politics. Oxford: University Press.

Rueschmeyer, C.D., Stephens, E.H. and Stephens, J.D. (1992): Capitalist Development and Democracy. Cambridge: Polity Press.