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Abstract

Context

Two worldly philosophers writing during the Second World War wrestled with the relationship between economic systems – such as capitalism vs. socialism – and political systems – democracy vs. autocracy.

The first was Schumpeter (1942), an Austrian economist who later moved to Harvard. One of his assumptions – that the rise of monopoly capital and modern corporations would inevitably lead to socialism by concentrating the means of production – did not materialize. Instead, corporate capitalism became the norm in the post-war era, first in the regime of managerial capitalism, and later as financialized capitalism.

Schumpeter’s other assumption – that socialism and democracy were incompatible since the former centralizes power while the latter decentralizes it – had more mixed results. It has certainly been the case in the former Soviet Union, China, Cuba, and North Korea. But a democratic form of socialism also returned, in what is now known as les Trente Glorieuses in Europe and the New Deal in the U.S.

But even in these hybrid cases, the economy was fundamentally capitalist. The democratic polity imposed certain restrictions on capital, creating a social welfare state and nationalizing certain industries, but wage labor and the private ownership of the means of production were not eliminated.

Thus, for the duration of the Cold War, a spurious contrast existed. A free (capitalist and democratic) but unequal West, vs. an equal (socialist and non-democratic) East. Naturally, this was a simplification, convenient for ideological and geopolitical purposes, but even the illusion collapsed in 1991. Why?

The Problem

The inverse of Schumpeter’s second assumption – i.e. that capitalism is compatible with democracy – fared even worse than the first. Championed first by Friedman (1982) and then, at the end of the Cold War by Fukuyama (1989), the notion that ‘economic freedom’ somehow naturally led to ‘political freedom’ was never realized. Two logical problems explain this conceptual error.

First, ‘economic freedom’ has usually meant freedom of corporations from the state, rather than individual economic freedoms (e.g. from hunger, scarcity, or exploitation). Thus, it was economic freedom only for big market players, or as Streeck (2014) calls them, Marktvolk, as opposed to economic freedom for all citizens, the Staatsvolk. Thus, political and economic freedoms belonged to two different (and only partly intersecting) groups ⁽¹⁾.

Second, even the limited economic protections and freedoms offered by the hybrid capitalism of the immediate post-war era were dismantled quickly starting in the 1980s and accelerating in the 1990s. Now that state-socialism was no longer a threat, capital went on the offense and drove the ‘social’ out of the social-democratic compromise. Not surprisingly for students of history, these events led to the return of far right and even fascist and neo-Nazi parties in many capitalist countries (including both western and eastern Europe as well as the US). This is something that the other great thinker of the early 1940s already understood.

Polanyi (1944), while an Austrian like Schumpeter, was an economic anthropologist and sociologist. This different background might explain the difference of his outlook from that of Schumpeter. Polanyi saw the Great Transformation after the First World War as a process in which the economy, long embedded in the polity, finally broke free and in some dimensions overtook the rules of society. Labor, land and even money became commodified, and the ensuing social unrest led to the rise of fascism, which attempted to bring back the superiority of politics over economics.

This double movement is also visible in the return of fascism since 2000. Various democracy indices show decline in both Europe and North America, as people lose trust in the institutions of democracy and in voting itself.

Political scientists have documented how hyper-capitalism has diluted or hollowed out democracy (Gilens and Page 2014, Bartels 2016). Laws and policies no longer reflect the views or positions of the middle-class or even most citizens, but those of corporations and the wealthy elite. This is due to a combination of factors, such as the increasing cost of participating in political campaigns, the resulting amount of money in politics, and the decline of unions.

A Theoretical Alternative

What can we learn from the combined insights of Schumpeter and Polanyi?

An immediate lesson is that neither a commitment to capitalism nor to socialism, as economic systems at their core, can tell us anything ex ante about the political system that would be compatible with them. Deciding on the economic system first and then attempting to see if it is compatible with democracy is bound to fail, as demonstrated by both communist and fascist reactions to these economic ideals.

Another complication is that while political science gives a key role to the concept of power, in economics, especially the modern kind, power has a very narrow and marginal meaning (market power).

We propose two theorems based on these observations:

Theorem 1: Power is fungible.

Where economic power is centralized – whether in private, corporate hands or in the state – even an initially decentralized political system (democracy) would become centralized through the channels described above. Likewise, when political power is centralized (various kinds of autocracy), even the most decentralized economic system would tend towards centralization.

Theorem 2: Individual liberty is absolute, while social liberty is relative.

At the individual level, liberty – both positive and negative – is absolute. Person A can have the freedom to do Y or not, and be free from Z or not, regardless of person B’s freedoms. At a social level, however, inequality means that if A is more powerful than B (economically, politically, or both), A can impinge on B’s freedoms.

This dialectic between liberty and equality can be seen in the following table:

		Equality
		Yes	No
Liberty	Yes	Democracy	Capitalism
	No	Socialism	Autocracy

The two systems on the diagonal – capitalism and socialism – are unstable, given the fungibility ofpower. Both degrade to some form of autocracy (communism or fascism).

This implies that both socialism and capitalism (which concentrate economic power) can be compatible with autocracy (centralized political power), but neither is compatible with democracy (decentralized political power).

The Way Forward

The logical conclusion from this analysis is that the economic system compatible with (political) democracy would necessarily have a decentralization of economic power, that is, economic democracy.

This statement has several implications. First, the choice of political system is made prior to the choice of economic system. In Streeck’s terminology, priority is given to the Staatsvolk, the citizens. They can then choose any economic system they wish, but the only sustainable one (given the fungibility of power) is to have a decentralized (democratic) economy as well. Hence capitalism, socialism, or democracy, 80 years after Schumpeter’s book.

Second, given the relativity of social freedom, true democracy implies both equality and freedom. What this means in practice needs to be elaborated, since perfect equality, especially in the economic realm, is neither possible nor necessarily desirable. What matters is the decentralization of economic power. Some policies which support this goal include:

• Campaign finance reform – prohibiting unlimited private donations to political campaigns
• Non-profit energy and financial systems – user-owned energy grids, credit unions, cooperative and municipal banks, all reduce the power of energy corporations and big banks to interfere in politics
• Central bank democratization – the myth of the ‘independent central bank’ evaporates as soon as we realize such banks are owned and controlled by commercial banks, hence dependent on them. Since power, like nature, abhors a vacuum, democratic public control of the central bank is preferrable to private corporate control

All these are policy options at the national level. However, as Slobodian (2018) reminds us, national polities are constrained today by supra-national economic and financial institutions. It is therefore urgent to reform such organizations (World Bank, IMF, WTO).

As these institutions themselves are non-democratic and assign voting power based on economic strength, reforming them is therefore only possible if the biggest economies (the US and the EU in particular) first undertake national economic decentralization policies (which would make them real, rather than nominal democracies), and then use their power in the international arena to withdraw the supra-national interference in domestic economic and political decision making.

References

Bartels, L. M. (2016). Unequal democracy: The political economy of the new gilded age. Princeton University Press.

Friedman, Milton. (1982). Capitalism and Freedom. Chicago and London: University of Chicago Press.

Fukuyama, F. (1992). The End of History and the Last Man. New York: Free Press.

Gilens, M., & Page, B. I. (2014). Testing theories of American politics: Elites, interest groups, and average citizens. Perspectives on politics, 12(3), 564-581.

Polanyi, K. (1944). The Great Transformation and the Origins of Our Time. Beacon Press.

Schumpeter, J. A. ([1942] 2013). Capitalism, Socialism and Democracy. Routledge.

Slobodian, Quinn (2018) Globalists: The End of Empire and the Birth of Neoliberalism. Cambridge, MA: Harvard University Press.

Streeck, Wolfgang. (2014): Buying Time: The Delayed Crisis of Democratic Capitalism. London: Verso.

1) One can extend Streeck’s logic to state-socialism, where Parteivolk are in charge.

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