October 2006
Free Markets and Democracy
ANGUS SIBLEY
For most American analysts...the market and democracy are absolutely
inseparable; China seems to dissociate them with stunning success.
Erik
Israelewicz, in an interview with Valéry Giscard d'Estaing, Le
Monde 23 February 2005
The neo-liberal utopias have this in common: they dissolve politics in
economics.
Vincent Valentin, Les conceptions néo-libérales du droit
(Economica, Paris, 2002), part III, ch. ii
Capitalism is a democracy in which every penny represents a
ballot-paper.
Ludwig von Mises, Socialism, an Economic and Sociological Analysis, tr.
J Kahane (1931), p 428
Despite the evidence, free-marketeers assure us that democracy and
deregulated markets are inseparable. But one can argue that the are
incompatible.
A tiresome refrain
We hear it repeated ad nauseam. Libertarians insist that democracy and
free markets go inevitably together, that we cannot enjoy the one
without accepting the other. For the free-marketeers, this is a good
way of persuading us to tolerate their policies, even if we do not
welcome them. The propagandists are too infatuated with their doctrine
to be concerned with its historical accuracy. In fact, as we shall see,
there are many gaps in their argument.
First, it is clear that free markets can exist in the absence of
democracy. In our own times we see largely deregulated capitalism in
action in China and Singapore; Chile under Pinochet was a notorious
example of Thatcherite policies. But perhaps the best example in modern
history is Britain itself. In the land of Adam Smith and David Ricardo,
the free-market dogma they preached was already dominant by the end of
the 18th century. It remained so through the following century.
However, as a matter of practical policy, there was a gradual move away
from that dogma in the later 19th century, and it was effectively
abandoned in the 20th, soon after Britain had acquired the full
attributes of modern democracy.
Second, democratic states are not necessarily run on free-market lines.
After world War II, most West European economies were more or less
distant from the free-market model; France was perhaps the furthest
removed of all.
Britain in the nineteenth century
The
first decades of the century saw the high-water mark of the libertarian
economic doctrine of Smith and Ricardo.
The
Combination Acts of 1799 and 1800 attempted to outlaw combinations of
employees (trade unions) and associations of masters (guilds). In 1814,
justices of the peace (local magistrates) lost their historic right to
regulate wages. Foreign trade was still subject to tariffs, but a
vigorous free-trade movement gathered strength in the 1830s, resulting
in the abolition in 1846 of the Corn Laws, which had imposed tariffs on
imported grain and other foodstuffs. The guilds, which had regulated
traditional crafts, lost their privileges. New industries escaped
regulation until the various Factory Acts gradually prohibited
excessive working hours, employment of women and children in coal-mines
etc. These Acts were passed throughout the 19th century, but their
effectiveness was limited until the 1860s.
Was
the Britain of that period democratic? Sure, it was ruled by an elected
Parliament; but the number of electors was tiny. Only (1) about 2% of
the population was eligible to vote before the Reform Act of 1832,
passed by the government of Earl Grey, whose tea we still drink.
The
pre-reform electoral process was bizarre. In some constituencies the
local landowner could nominate a member of Parliament without any vote.
Indeed, in the 1826 election, there was no voting at all in Scotland.
Other constituencies had very few electors, and they were readily
bribeable: the expenditure of a few thousand pounds would buy all their
votes (2). In general, the old rural constituencies were
over-represented at the expense of the new industrial towns. These
anomalies were so serious that (2) it has been estimated that less than
a third of the whole Parliament was returned by a comparatively free
vote of the electors. Even after Grey's reforms of 1832, the electorate
(1) was less than 3.5% of the population. The purely hereditary House
of Lords still had considerable power. And no woman could vote.
So
the political system was very far from being democratic in the modern
sense of the word. Not until Gladstone's reforms of 1884/85 were most
adult men eligible to vote; women were not fully eligible till 1928.
That is to say, shortly before the near-abandonment of the free-market
model during and after World War II.
Post-war France
Here
is a fine example of a situation diametrically opposite to that of
Britain in the Napoleonic era: a democracy whose successful economy had
little in common with the free-market ideal.
In
1944, General de Gaulle's provisional government faced a devastated
economy, deficient in manpower, infrastructure, materials, even food.
The rate of inflation reached 30% in 1945. However, by September 1958,
when de Gaulle, restored to power following the crisis of 13th May, had
the constitution of the Fifth Republic approved by referendum, a
near-miraculous transformation of the economy had been achieved (3).
Growth of the gross domestic product averaged 4.6% over the years 1950
to 1959. The period 1960 to 1973 was still better, with average growth
of 5.5%.
This
remarkable recovery was achieved under a régime which would
horrify any economic libertarian today. Even before the war, France had
many state-controlled enterprises, including the post office, the
tobacco industry, two major banks (Crédit Foncier and the Caisse
des Dépôts), the transatlantic shipping line (Compagnie
Générale Maritime), the railways and Air France.
After the Liberation of 1944, the following were nationalized, among
others: SNECMA (manufacturer of aircraft engines), Renault, the coal,
electricity and gas industries, the Banque de France, three leading
commercial banks and eleven insurance companies. Furthermore, a whole
arsenal of interventionist practices was installed. There were state
controls on wages, prices, credit and rents. And one national economic
plan followed another: le plan Monnet, le plan Hirsch, le plan
Massé…
Despite all that, France was a democracy - and an increasingly
prosperous modern economy with full employment. So let us stop
listening to those free-market obsessionists who will trundle out any
argument, however flimsy, to convince us that their policies are the
only good ones.
Libertarianism threatens democracy
Despite the evidence, free-marketeers assure us that democracy and
deregulated markets are inseparable. But one can argue that the are
incompatible.
Libertarians want to take as many powers as possible away from the
state, and hand them over to the market. Primarily because many of them
simply detest the state. For example, Friedrich von Hayek was
anti-statist because of his disgust with the fascist and communist
monstrosities that ruled much of Europe in the early 20th century.
But
the libertarians also have a quite different motive: they believe that
the market is more efficient than the state. They argue that you vote
in the polling-booth only once every few years, but you vote in the
marketplace every time you spend any money. As their idol Ludwig von
Mises put it (he was Hayek's teacher), capitalism is a democracy in
which every penny represents a ballot-paper. So they want as many
decisions as possible to be taken by the market rather than by
politicians. The market reacts more quickly and efficiently to the
wishes of consumers. As for the wishes of producers (workers of all
kinds), from the libertarian standpoint these are of little importance.
Adam Smith said it all (4): the interest of the producer ought to be
attended to only so far as it may be necessary for promoting that of
the consumers.
Thus, in the land of the libertarians' dreams, the powers of the state
are minimal, while those of the market are effectively unlimited. The
government can still be elected by democratic procedure; but the powers
of citizens as electors are very limited, since the government they
elect has been deprived of most of its powers.
On
the other hand, the powers of the citizens as consumers are dominant.
The problem: in politics, each citizen has one vote; while, in the
marketplace, citizens' purchasing power is very unequal. The democratic
polity works on the principle of one person, one vote; the marketplace,
on that of one dollar, one vote. You call that a real democracy?
A
society governed by the principle of one dollar, one vote will
increasingly serve the wishes of the most affluent rather than the
needs of the poorest. It will suffer persistently growing inequalities,
as in fact we see today in countries that have recognized, to a greater
or less degree, the sovereignty of the market. This is a vicious
circle. Such a society may remain democratic in theory, but it will
grow less and less democratic in practice, since it will be
increasingly dominated by the affluent elite, while the powers of its
elected government weaken.
The
French legal academic Vincent Valentin describes the situation well:
the utopias of the libertarians have this in common: they dissolve
politics in economics…the minimal state is an arrangement which aims to
offer individual self-fulfillment purely through the cult of
independence; which is why its plans for reform lack a properly
democratic dimension…
Those who dislike well-developed, protective, regulatory states are
often attracted by the libertarian dream of a society ruled by the free
market rather than by state bureaucracy. Alas, in reality their dream
would turn into a nightmare.
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References
(1) Frank O'Gorman, The Long Eighteenth Century (Arnold, London, 1997),
pp 322, 369, 376
(2)
E H Carter & R A F Mears, A History of Britain (Oxford, 1948),
chap. xxxvii
(3)
Jean-François Eck, Histoire de l'économie
française depuis 1945 (Armand Colin, Paris, 1998), p 3
(4)
Adam Smith, The Wealth of Nations (1776), book IV, chap. viii