Here is my final post as guest blogger at Free Exchange:
I BEGAN the week discussing the link between capitalism and democracy. In my initial post, I emphasized the importance of economic freedoms for generating political freedoms. In the current issue of Foreign Affairs, Michael Mandelbaum echoes this same logic:
The desire for a democratic political system does not by itself create the capacity for establishing one. The key to establishing a working democracy, and in particular the institutions of liberty, has been the free-market economy. The institutions, skills, and values needed to operate a free-market economy are those that, in the political sphere, constitute democracy.
To reiterate the connection between capitalism and democracy, free markets tend to foster democracy because private property, which is central to any notion of capitalism, produces a sphere of autonomy that grants each individual certain liberties. Private property disperses power and shields each person from coercion. Further, well-defined property rights tend to encourage the emergence of private civil associations. As I discussed in an earlier post, these private associations provide individuals with an alternative form of governance where the state is ineffective or absent. A robust civil society fosters self-reliance and individual responsibility, characteristics necessary for any liberal democratic order.
The realization of the importance of markets for the spread of democracy has important implications. Instead of attempting to promote democracy through military occupation and “nation-building,” a more effective strategy for encouraging democracy is the spread of markets. Along these lines, in my analysis of the political economy of exporting democracy, I conclude that the best policy for the United States is one of non-intervention and a commitment to unilateral free trade with all countries. What better way to demonstrate the benefits of economic and political freedoms to those that currently lack them than allowing them access to those very institutions?
Several comments on my original post provided examples of “crony capitalism” in the United States, whereby those with political connections utilize the political apparatus to avoid the competitive pressures of markets. While I appreciate and agree with these examples, they do not undermine my general point because of two key issues.
The first issue is fostering liberal democracy in countries where it does not currently exist. In these instances, I would argue that the spread of capitalism and free-markets is the best means for achieving this end. A second issue is the maintenance and sustainability of economic and political freedoms in those countries that already have some form of liberal democracy. The existence of crony capitalism in the United States and other mature liberal democracies falls into this second category. I fully agree that the use of the political apparatus to avoid the competitive pressures of the market is harmful to both capitalism and democracy. However, this is not an argument against capitalism and free markets per se. Instead, it is the recognition of the importance of rules to constrain the grabbing hand of the state and the abuse of the state machinery by private individuals.
The sustainability and progress of economic, political and social liberties are outcomes of two opposing forces. On the one hand, there are “productive” activities, including wealth creation, the development of private associations and the protection of political liberties. On the other hand, there are “unproductive” activities, which include rent-seeking, corruption and crime. Unproductive activities undermine economic, political and social liberties. The ultimate outcome of these two forces is directly dependent on the rules of the game. To the extent that we agree that economic and political liberties are desirable ends, the task is to design rules that raise the relative cost of engaging in unproductive and predatory behaviors.