Why Capitalism and Democracy Aren't Interchangeable

Capitalism and democracy: two pillars of America that I had historically thought to be one and the same. I had considered this solely on the philosophy of freedom — while capitalism allows freedom to financial prosperity and choices, democracy allows the freedom to vote and basic human rights. However, the two are very different and both vital to function.

Throughout history, power has tended to reside in the hands of one of three spheres: the church (religious), the military (kings, queens and government), and the commercial sector. Jacques Attali addresses this in A Brief History of the Future: A Brave and Controversial Look at the Twenty-First Century: a bit pricey but one of my favorite reads (he summarizes the history of the world very neatly and moves on to social trends shaping the future). We are currently in an arena where the commercial sector is largely manning the power hub.

Now capitalism and democracy are both systems that deal with the distribution of power amongst individuals. In particular, capitalism empowers those individuals that possess greater wealth, affording them investment opportunities and corporate positions of influence. Democracy, on the other hand, empowers each individual equally, providing an important balance of power. No matter how rich you become, you are constrained to a single vote.

When properly functioning, this prevents the ultra-wealthy from taking strict advantage of the underprivileged. In the event that the income gap (the amount of money the top earners make versus the rest of the country) becomes too disproportionate, the lower- and middle-classes will vote for a redistribution of their wealth. Suppose that only 5% of workers made 90% of the income. You would quickly see the other 95% vote to tax and redistribute that wealth.

The recent backlash at the banks is a tangible demonstration of this interplay. The public felt that the bankers had become too greedy and that Wall Street prospered at the expense of Main Street. As a result, the UK has imposed a one-time tax on their bankers, and momentum is mounting to further regulate the international financial industry.

This push and pull, when properly functioning, is what allows individual greed (capitalism) to wrestle with individual freedom (democracy). Over the years, however, our system has broken down, for reasons I will discuss in the next post.