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Is Capitalism Destroying Democracy?

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Is Capitalism Destroying Democracy?

The following remarks were delivered at the American Society for Competitiveness Conference on October 26, 2018.

When Duke University historian Nancy MacLean released her book “Democracy in Chains: The Deep History of the Radical Right’s Stealth Plan for America” last Summer, it unleashed a tidal wave of claims from the progressive left that libertarian economists, funded by capitalist billionaires, had subverted American democracy for the past forty years.

Progressive idol George Monbiot, for example, said that Nobel prize-winner James Buchanan, the primary subject of MacLean’s book, had a vision of “totalitarian capitalism.” He claimed that Buchanan “sought to break the links between people and government, and demolish trust in public institutions. He aimed, in short, to save capitalism from democracy.”

Monbiot concluded: “In one respect, Buchanan was right: there is an inherent conflict between what he called “economic freedom” and political liberty. Complete freedom for billionaires means poverty, insecurity, pollution and collapsing public services for everyone else. Because we will not vote for this, it can be delivered only through deception and authoritarian control. The choice we face is between unfettered capitalism and democracy. You cannot have both.”

These are serious charges and deserve a serious exploration. Is capitalism destroying democracy?

The case is two-fold. First, there is a claim that a network of scholars funded by billionaires has engaged in a stealth campaign to destroy democracy. That is a claim that is difficult to assess, but boils down to motive. I shall return to it towards the end of my talk. The more fundamental claim is that the policies advanced by these scholars and adopted by politicians have had the effect of thwarting democratic decisions.

The argument, as Monbiot summarizes it, is that a series of laws, regulations, and court judgments that privilege economic freedom, by which he presumably means the ability to exploit people and impose social costs, have resulted in de facto totalitarian control of people by the ultra-rich, the capitalists. In a true democracy, people would be able to use the political process to put laws and regulations in place that would overturn those privileges and force the capitalists to contribute to providing wealth, security, public services, and environmental protection for everyone’s benefit.

This why MacLean, Monbiot, and others talk about democracy as being “in chains.” The people’s democratic will, they claim, is unable to move against the totalitarian communists because the game is rigged against it, and we have Buchanan and free-market economists to blame for that subversion of democracy.

Now as it happens, I am a free-market economist. I even head something called the Center for Economic Freedom at the Competitive Enterprise Institute. I am therefore, perhaps unsurprisingly skeptical of these claims. So when it comes to my objections, those sympathetic to MacLean et al might say, in the British expression, “He would say that, wouldn’t he?” Others might go so far as to call me a “useful idiot,” and I suppose they’d be half right.

But I think I have good reason to dispute these claims. In many ways, my arguments rely on moral and political philosophy just as much as economics. For we can only decide whether democracy is being subverted if we understand what democracy actually is first. If MacLean, Monbiot, and their supporters have misunderstood American democracy, or indeed modern democracy in general, then their claim may actually be a category error.

My first point is that democracy is already enchained. We accept limitations on the democratic will in all sorts of areas. We do not allow the people to ban any form of political speech, for example. We do not allow the people to segregate their communities on the basis of race. We do not allow the people to impose religious views or obligations on others.

It is important to note that these constraints on government are normally referred to in our political discourse as “rights.” Indeed, they are liberal and even progressive ideals enshrined in the system. They are what are known as negative rights – declarations that the government shall not do things. They stand in contrast to positive rights – declarations that the government shall do certain things, such as provide a job, home, or healthcare.

It is here that the distinction between what MacLean et al are complaining about and the way American democracy is set up starts to become apparent. American democracy is based around negative rights, not positive rights. Yet MacLean et al would like it to be based around positive rights.

We’ll come back to this in a minute or so, but it is worth noting that negative rights play a very important function. The father of both liberalism and libertarianism, John Stuart Mill, warned about what he termed the “tyranny of the majority.” The problem is that simple majority rule can result in a totalitarianism of its own, where, to use more modern terminology, the in-group can use majority rule to exploit and oppress.

So while “government of the people by the people for the people” still resounds, we often forget that the people can use government to define who people are. They can choose to exclude women, Jews, Muslims, or the transgendered. In other words, democracy itself can be totalitarian, unless it is implicitly or even explicitly enchained.

American democracy has recognized this since the passage of the Bill of Rights. We don’t get to vote on everything. We explicitly say that whatever the will of the people is, it can’t do certain things. To be sure, there’s a process to change those constraints, but it’s by design a heavy lift to do so. Because American democracy recognizes these rights and freedoms, we can term it a liberal democracy.

Now MacLean and Monbiot might argue that indeed they recognize that, but that what they are arguing for is not the ability to infringe human rights, but simply to correct mistakes in the economic system that result in winners and losers, and that furthermore these corrections should be regarded as human rights.

Yet it is certainly possible to view “economic freedom” as a human right – and that is nothing new, certainly no invention of recent free market economists. Roman law recognized a sovereign right of property. The first draft of the Declaration of Independence, following the philosopher John Locke, talked of “life, liberty, and property” as inalienable rights.

This is certainly disputed. The phrase “property is theft” is familiar to all. Yet it is not outrageous, given the long legal and philosophical history of recognition of property rights, to say that property rights are human rights and should therefore receive some degree of protection from the vicissitudes of majority rule.

Indeed, as the economist Armin Alchian has noted, “The definition, allocation, and protection of property rights comprise one of the most complex and difficult sets of issues that any society has to resolve, but one that must be resolved in some fashion.” History suggests that societies without any property rights at all do not fare well. The well-known “tragedy of the commons” afflicts them, and resources are depleted and wasted (although Elinor Ostrom won a Nobel Prize for pointing out that there are common ownership regimes with well established rules and rights). That failure is why the social critics of property rights generally do not want them abolished but transferred in some cases to public ownership or control.

So when MacLean et al tout democracy as their ideal, we have to ask, what sort of democracy are we talking about? It will presumably be a democracy that recognizes the constraints of human rights and of the necessity for some form of property rights. Yet it would have the unlimited power to abrogate or expropriate some property rights in the name of justice.

Such a democracy is certainly possible. I grew up in one. The Westminster system of democracy recognizes Parliament, made up of the people’s representatives, as sovereign, unconstrained by any higher law. As a result, the British Parliament was able in the 1940s and 50s to expropriate property in the name of the people by creating nationalized industries and services. The might of business was balanced by the might of labor unions. Although the creators of the system referred to it as democratic socialism, several conservative governments accepted the situation as settled.

Something similar did happen over here. The New Deal, as originally established, gave government a large amount of control over the economy. Labor unions became very powerful. The federal government was allowed to expropriate all gold in private possession, and a plethora of executive agencies, some independent of Presidential control, put in place regulations that severely restricted the enjoyment of private property.

This system saw some setbacks – labor unions had their powers curtailed as early as 1946 – but in many ways it was enhanced in the Great Society in the 1960s and with the passage of a large number of environmental laws in the 1970s that further constrained the use of private property.

To a large extent this system is still in place today. To all intents and purposes, property rights do not hold some privileged constitutional position. To the contrary, the decision of the United States Supreme Court in Wickard v Filburn in 1942 established something akin to Parliamentary supremacy in economic matters.

The case involved an Ohio farmer, Roscoe Filburn, who was growing wheat to feed animals on his own farm. Under the terms of the Agricultural Adjustment Act of 1938, the federal government had imposed caps on wheat production in an effort to stabilize prices. Filburn was producing more than the caps, but for his own use, not for sale. Nevertheless, he was fined by the Department of Agriculture.

 

The court upheld the fine, saying that the commerce clause of the US Constitution allowed the federal government to regulate wheat production. While Filburn’s own activity did not affect interstate commerce, the court found, the aggregation of many farmers doing the same would do so. The commerce clause effectively gave Congress the power to abrogate property rights. This remains the case today. While court cases have found that the commerce clause would not apply in such matters as regulating the carrying of handguns, in economic matters the commerce clause still enables exactly the sort of activity that MacLean and Monbiot would approve of.

 

Indeed, the US government still regulates virtually every aspect of economic life, and state and local governments regulate more. Ask anyone who has tried to found a business whether they can do so free from the invigilation of government. The answer is a resounding no. Occupational licensing requirements plague the individual tradesman. The prospective employer faces a plethora of regulations she must comply with to hire her first employee. There are more for the second, then yet more for the fifth, and so on. Contributions to mandatory government programs reduce the amount the employer can pay the worker, and so on. And that’s without even mentioning healthcare.

 

So in reality we are looking at a different form of category error. The system MacLean and Monbiot claim is being prevented is actually the one we live under. Property rights are not guaranteed. Far from democracy being in chains, it is economic freedom that is shackled.

 

Now MacLean et al recognize this to an extent. They claim that the secret cabal of free market economists of which I presumably am a part want to weaken the system of majority rule by instituting radical reforms that will enrich their hidden masters and oppress the poor.

 

This is where we must ask just how radical are these reforms and how will they result in oppression.

 

To be sure, all of us in the cabal would like to see the US Supreme Court repudiate its decision in Wickard. The commerce clause really has no business in empowering Congress to regulate a private decision on a private farm. We’d argue that that applies to marijuana just as much as to wheat – and the court has ruled that Wickard applies in such matters.

 

Would restraining such use of the commerce clause be a radical change? Yes. Would it reduce the power of Congress? Yes. Would it lead to oppression? I struggle to see how. And is it easy get the Supreme Court to change its mind? No, manifestly not.

 

There is no secret process to getting radical systemic change. The same holds true for all radical change, whether it be free-market or progressive, nationalist or globalist. It requires either the enormous lift of a constitutional amendment or it requires getting the Supreme Court to find something so important that it mandates ignoring the legal doctrine of stare decisis – stand by your decisions.

 

A radical change did recently occur in a case called Janus, where the court reversed previous rulings that allowed labor unions to automatically withdraw dues from a government worker’s paycheck that it then spent on political speech. One might argue that this was an example of democracy being overturned to the detriment of labor unions. Yet the reason why it was overturned was not an economic one. It was because the unions were coercing Janus to contribute to their political speech. Freedom of speech is an important right, even if it is under attack these days, and so the decision is obviously part of a long tradition of the institutions of liberal democracy upholding the rights of the little guy against the powerful. There is no exploitation here.

 

So why were progressives so upset about the decision? It is a core progressive belief that collective action, expressed through labor unions, is a key check on the power of industry to suppress wages. To ensure this happens, labor unions are given special privileges in law.  Overturning those democratic decisions to grant special privileges is an attack on collective action and an attack on democracy.

 

The trouble here is that progressive thought has elevated collective action to a privileged position it does not really hold. Labor unions are not part of the American constitutional settlement. Freedom of speech is.

 

Elevating labor unions to a constitutional position is, of course, possible. In effect, supreme court decisions about various aspects of the National Labor Relations Act have already done so. There is very little appetite in Congress for reforming the NLRA in any major way. Yet when it comes to a conflict between labor union privileges and a constitutionally-guaranteed right, the constitutionally-guaranteed right is probably going to win. The fact that in the court’s previous verdict on the matter, a case called Abood, the court did not say that freedom of speech trumps union law speaks volumes about just how privileged labor unions already are.

 

Indeed, those privileges point us towards something that is not immediately apparent when we are talking about American democracy. There are in fact two constitutional orders in America today. One was established in 1776 and amended substantially after the civil war by the constitutional amendment process. The other was created in the New Deal and established largely by court reinterpretations of the constitution – Wickard being a case in point. It is the constitutional order of privileged labor unions, independent agencies free from executive control, and a code of federal regulations that vastly exceeds the length of the legal code. This is the constitution of positive rights, and it is the constitution that MacLean et al are desperate to defend.

 

This system exists in tension with the first system. For instance, every American knows that he is entitled to his day in court. However, when administrative law is at issue, the American will find himself dragged through a punishing series of encounters in administrative courts and tribunals long before he ever gets a chance to present his case in the courts established by Article III of the constitution. When he finally gets there he will discover that under judicial doctrines of deference, the courts are likely to side with the agency he has struggled with for so long. He might hope that the President he voted for can reign in the agency – but he may find that the law grants the agency independence from the President. He might hope that the Congress will cut off funding to the agency, but then discover that the agency keeps on going regardless until Congress relents and starts funding it again. That actually happened recently with the Export-Import Bank.

 

This system might have been passed in democratic fashion, and even have passed constitutional muster with the courts, but one has to ask whether it is really what the American system is supposed to provide for its citizens.

 

Indeed, over the past thirty or so years we have seen less democratic involvement in this system. It relies on the judgment of experts proposing regulations that the public can comment on, but not stop, rather than the people’s direct representatives debating the pros and cons. My colleague Wayne Crews has compiled what he calls an Anti-Democracy Index, comparing the number of regulations imposed by agencies with the number of laws passed by Congress. It now averages around 30 to 1. Agencies add tens of thousands of pages to the Federal Register every year, and there have been over 100,000 rules finalized since 1993.

 

I mentioned independent agencies earlier. Although free from the check of Presidential authority, they have traditionally been balanced internally by a commission structure, allowing for some form of debate over new regulations. They have also been subject to the power of the purse exercised by the people’s representatives in Congress. Yet since 2010 we have had a new form of independent agency, best exemplified by the Bureau of Consumer Financial Protection. It has a sole director that the President cannot remove, and it is funded on request by the Federal Reserve, not Congress. Courts are instructed to give extra deference to its decisions. It is as undemocratic a government office as you can think of – and yet its continued existence in this form is a progressive shibboleth. The progressive DC circuit has of course said that the structure is constitutional.

 

So just who is it that is enchaining democracy? The free marketers who support individual rights, or the progressives who have established a shadow constitution that gives massive power to the unelected?

 

Indeed, perhaps we should reassess the role of civil liberties, including property rights, in securing the benefits we ask for from our constitutional order. We should ask whether capitalism poses as much a threat to democracy as collectivism. We should ask whether the institutions of liberty promote the general welfare more than the rule of experts.

 

All the evidence points towards liberal democracy being a better performer in securing benefits for the people than democratic socialism. I experienced both systems myself. The democratic socialist Britain of my youth was a depressing place. Nationalized industries degraded infrastructure and provided poor levels of service. I shudder when I remember the British Rail sandwich – a thin and greasy slice of ham between two curling slices of stale bread. Labor unions were constantly on strike for higher wages, which led to rampant inflation. Even gravediggers went on strike, with the dead lying unburied for weeks. It would take months to get a new phone installed. Because of the strength of the unions, important political decisions were taken not in Parliament, but in what were called “smoke-filled rooms” over “beer and sandwiches” between the people’s ministers and the union leaders. Some democracy.

 

Eventually, the British people had enough. They elected a Prime Minister with a radical agenda – yes, one influenced by free-market economists. Margaret Thatcher introduced radical change. She did it by passing laws and being re-elected three times. The Britain she set free is a far better place today than it was in the 1970s. Train buffets serve edible food. Inflation has not been a problem for decades. While labor unions do still strike occasionally, the dead do get buried. Cell phones became common in the UK far earlier than they did here. The Labour Party ruled for over a decade without seriously challenging the free enterprise system (although it has recently lurched far to the left). Britain today is a far better place than it was in the 70s thanks to that system.

 

And there is empirical evidence to support the connection between economic liberty and human welfare. Studies have repeatedly found that societies with greater economic freedom have higher standards of living and lower rates of disorder and crime. Other studies have shown the connection between structural factors such as the rule of law and an entrepreneurial ecosystem and social mobility. In environmental areas such as fisheries, evidence strongly suggests that private property rights can help manage, sustain, and even help fisheries recover. The evidence is so strong there that all the major environmental groups support catch shares – a form of private property right in fisheries.

 

There is an important moral dimension to capitalism too. If we believe in the human right of free association, which is the basis of labor union organizing too, we must believe in the right of people to combine their economic interests in the form of a corporation. At heart, the firm is an exercise in cooperation. It must consider the interests of all its parties – its customers, its workers, its suppliers, its managers, as well as its owners and investors – to be truly successful. In this respect, capitalism is not just beneficial, it is virtuous.

 

Virtuous capitalism strengthens democracy. By providing a better standard of living for all, it takes the need for certain political decisions off the table. We are already seeing how Uber and other sharing economy firms are providing an alternative to unemployment assistance for people temporarily out of work. Indeed, if by working a few extra hours via Lyft or TaskRabbit you can get enough money to pay the electricity bill, you may not need to take out a payday loan, meaning that regulation of payday loans becomes less important.

 

Taking these decisions off the political agenda means that we are less likely to use the coercive power of government, whether it be through taxation or through small towns extorting money in the form of speeding fines from minority drivers – a clear case of the tyranny of the majority. The rise of what is often derisively called neoliberalism has over the past forty or so years secured public ends through private means. Much remains to be done, but that is arguably because economic freedom remains constrained to a very great extent even in the freest countries of the world.

 

This brings me back to motive. There is no-one I know in the free market movement who is doing what they are doing for anything other than the very best of motives. They’re certainly not in it for the pay! They believe strongly that free enterprise helps people – and may help the poorest the most. They believe that thieves, frauds, and cowboys should be punished – either by the market driving them out of business in its search for quality or, in the case of the frauds, by the long-established processes of civil and criminal law. Above all they believe that capitalism is virtuous.

 

Most of them – not all, I admit – also recognize that their progressive critics generally have only the best of motives at heart. They do so from a position of epistemological humility. It is a central part of free market thought that no-one can know everything about economics. As such, they recognize that they might be wrong. This, perhaps, explains the openness of many free-marketers who have studied the sharing economy to the idea of a universal basic income. They’d like to see some successful experiments, to be sure – and to date the experiments have not proved terribly successful – but they are open to the idea that replacing the means-tested welfare state with a flat grant of some sort open to all might be necessary in a world of less certain work arrangements. Hayek himself, we should remember, supported a welfare state of some form.

 

Sadly, this goodwill is not often reciprocated. An example occurs in Democracy in Chains, where Nancy MacLean writes that George Mason university economist Tyler Cowen wrote that “the weakening of checks and balances might increase the chances of a very good outcome,” meaning a move towards economic freedom. MacLean goes on to say that it is “fair to say” that Cowen is “creating…a handbook for how to conduct a fifth-column assault on democracy.”

 

Yet what Cowen actually wrote was, “While weakening checks and balances might increase the chance of a very good outcome, it would also increase the chance of a very bad outcome. Furthermore, the widely-perceived legitimacy of the US Constitution suggests that such a change would involve disastrous transition costs.” In other words, Cowen recognizes that the price of having some obstacles to greater economic freedom is worth the cost, because those obstacles also prevent a ruinous loss of economic freedom. He further emphasizes that the US Constitution’s legitimacy makes it impossible to move to a different system without incurring disaster. This is as far from an “assault on democracy” as once can get.

 

When Stanford’s Russ Roberts pointed this out to MacLean, she accused him of “playing a snapshot ‘gotcha’ game” and refused to concede the point, instead reiterating it.

 

I will make no further comment on the nature of MacLean’s scholarship, as my time is running short and I prefer to leave that debate to the academics. Instead I shall restate my main points.

 

There is a long and noble philosophical tradition that the tyranny of the majority is to be feared.

 

The American system of government is not one of majority rule, but a liberal democracy that recognizes rights as constraints on government.

 

That, despite this tradition, a system of government has emerged that has very little to do with democracy.

 

And that economic freedom has significant benefits and can even be regarded as virtuous.

 

From this I conclude that the complaints of the progressive ultras have very little basis in fact. Democracy has not been shackled by a small cabal of free marketers. If they are doing anything, they are trying to restore the constitutional system of democracy that was derailed in the New Deal and that will help secure the Blessings of Liberty to ourselves and our posterity, as someone once wrote.

 

We recognize that opinions differ on this, and that in the end any such change will have to come about either through the ballot box or the established procedures of constitutional argument in the Supreme Court, in other words, through the institutions of democracy.

 

Radicals we may be, but a fifth column we are not. Perhaps that is what makes us so easy to attack.