Unlike what neo-liberals say, market and democracy clash at a fundamental level. Democracy runs on the principle of ‘one man (one person), one vote’. The market runs on the principle of ‘one dollar, one vote’. Naturally, the former gives equal weight to each person, regardless of the money she/he has. The latter give greater weight to richer people. Therefore, democratic decisions usually subvert the logic of market.
Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
by Ha-Joon Chang
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Democracy and the free market
In addition to corruption, there is another political issue that occupies an important place in the neo-liberal policy agenda. It is democracy. But democracy, especially its relationship with economic development, is a complex and highly charged issue. So, unlike on issues like free trade, inflation or privatization, there is no united position on it among the Bad Samaritans.
Some suggest that democracy is essential for economic development, as it protects citizens from arbitrary expropriation by the rulers; without such protection, there will be no incentive to accumulate wealth; thus the USAID argues that ‘[e]xpanding democracy improves individual opportunity for prosperity and improved well-being’. Others think that democracy may be sacrificed if it becomes necessary in defence of a free market, as evidenced by the strong support offered by some neo-liberal economists to the Pinochet dictatorship in Chile. Still others think that democracy will naturally develop once the economy develops (which, of course, can be best achieved by free-trade, free-market policies), because it will produce an educated middle class that naturally wants democracy. Yet others sing the praises of democracy all the time but keep quiet when the undemocratic country in question is a ‘friend’ – in keeping with the realpolitik tradition represented by Franklin Roosevelt’s famous comment on the Nicaraguan dictator, Anastasio Somoza, that ‘he may be a son of a bitch, but he is our son of a bitch’.
Despite this diversity of views, there is a strong consensus among neo-liberals that democracy and economic development reinforce each other. Of course, neo-liberals are not unique in holding such a view. But what distinguishes them is their belief that this relationship is mainly, if not exclusively, mediated by the (free) market. They argue that democracy promotes free markets, which, in turn, promote economic development, which then promotes democracy: ‘The market underpins democracy, just as democracy should normally strengthen the market’, writes Martin Wolf, the British financial journalist, in his renowned book, Why Globalisation Works.
According to the neo-liberal view, democracy promotes free markets because a government that can be unseated without resorting to violent measures has to be restrained in its predatory behaviour. If they don’t have to worry about losing power, rulers can impose excessive taxes with impunity and even confiscate private property, as numerous autocrats have done throughout history.When this happens, incentives to invest and generate wealth are destroyed and market forces distorted, impeding economic development. By contrast, under democracy, the predatory behaviour of the government is restrained and thus free markets can flourish, promoting economic development. In turn, free markets promote democracy because they lead to economic development, which produces wealth-holders independent of the government, who will demand a mechanism through which they can counter the arbitrary actions of the politicians – democracy. This is what the former US president Bill Clinton had in mind when he said in support of China’s accession to the WTO: ‘as China’s people become more mobile, prosperous, and aware of alternative ways of life, they will seek greater say in the decisions that affect their lives’.
Leaving aside for the moment the question as to whether the free market is the best vehicle for economic development (to which I have repeatedly said no throughout this book), can we at least say that democracy and (free) markets are, indeed, natural partners and reinforce each other?
The answer is no. Unlike what neo-liberals say, market and democracy clash at a fundamental level. Democracy runs on the principle of ‘one man (one person), one vote’. The market runs on the principle of ‘one dollar, one vote’. Naturally, the former gives equal weight to each person, regardless of the money she/he has. The latter gives greater weight to richer people. Therefore, democratic decisions usually subvert the logic of market. Indeed, most 19th-century liberals opposed democracy because they thought it was not compatible with a free market. They argued that democracy would allow the poor majority to introduce policies that would exploit the rich minority (e.g., a progressive income tax, nationalization of private property), thus destroying the incentive for wealth creation.
Influenced by such thinking, all of today’s rich countries initially gave voting rights only to those who owned more than a certain amount of property or earned enough income to pay more than a certain amount of tax. Some of them had qualifications related to literacy or even educational achievement (so, for example, in some German states, a university degree gave you one extra vote) – which were, of course, closely related to people’s economic status anyway and were usually used in conjunction with property/tax conditions. So, in England, the supposed birthplace of modern democracy, only 18% of men could vote, even after the famous 1832 Reform Act. In France, before the introduction of universal male suffrage in 1848 (the first in the world), only around 2% of the male population could vote due to restrictions regarding age (you had to be over 30) and, more importantly, payment of tax. In Italy, even after the lowering of the voting age to 21 in 1882, only around two million men (equivalent to about 15% of the male population) could vote, due to tax payment and literacy requirements. The economic qualification for suffrage was, then, the flip side of the famous colonial American slogan against the British, ‘no taxation without representation’ – there was also to be ‘no representation without taxation’.
By pointing out the contradiction between democracy and the market, I am not saying that market logic should be rejected. Under communism, total rejection of the ‘one dollar, one vote’ principle not only created economic inefficiency but also propagated inequities based on other criteria – political power, personal connections or ideological credentials. It should also be noted that money can be a greater leveller. It can work as a powerful solvent of undesirable prejudices against people of particular races, social castes or occupational groups. It is much easier to make people treat members of discriminated groups better if the latter have money (that is, when they are potential customers or investors). The fact that even the openly racist apartheid regime in South Africa gave the Japanese ‘honorary white’ status is a powerful testimony to the ‘liberating’ power of the market.
But, however positive market logic may be in some respects, we should not, and cannot, run society solely on the principle of ‘one dollar, one vote’. Leaving everything to the market means that the rich may be able to realize even the most frivolous element of their desires, while the poor may not be able even to survive – thus the world spends twenty times more research money on slimming drugs than on malaria, which claims more than a million lives and debilitates millions more in developing countries every year.Moreover, there are certain things that should simply not be bought and sold – even for the sake of having healthy markets. Judicial decisions, public offices, academic degrees and qualifications for certain professions (lawyers, medical doctors, teachers, driving instructors) are such examples. If these things can be bought, there will be serious problems not just with the legitimacy of the society in question but also with economic efficiency: sub-standard medical doctors or unqualified teachers can lower the quality of the labour forces; venal judicial decisions will undermine the efficacy of the contract law.
Democracy and markets are both fundamental building blocks for a decent society. But they clash at a fundamental level. We need to balance them. When we add the fact that free markets are not good at promoting economic development (as I have shown throughout the book), it is difficult to say that there is a virtuous circle linking democracy, the free market and economic development, contrary to what the Bad Samaritans argue.
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When democracies undermine democracy
Free market policies promoted by the Bad Samaritans have brought more areas of our life under the ‘one dollar, one vote’ rule of market. In so far as there is a natural tension between free markets and democracy, this means that democracy is constrained by such policies, even if that was not the intention. But there is more. The Bad Samaritans have recommended policies that actively seek to undermine democracy in developing countries (although they would never put them in those terms).
The argument starts reasonably enough. Neo-liberal economists worry that politics opens the door for perversion of market rationality: inefficient firms or farmers may lobby the parliamentarians to get tariffs and subsidies, imposing costs on the rest of society that has to buy expensive domestic products; populist politicians may put pressure on the central bank to ‘print money’ in time for election campaign, which causes inflation and hurts people in the longer run. So far, so good.
The neo-liberals’ solution to this problem is to ‘depoliticize’ the economy. They argue that the very scope of government activity should be reduced – through privatization and liberalization – to a minimal state. In those few areas where it is still allowed to operate, the room for policy discretion should be minimized. It is argued that such restraints are particularly needed in developing nations where the leaders are less competent and more corrupt. Such restraints can be provided by rigid rules that constrain government choices – for example, a law requiring a balanced budget – or by the establishment of politically independent policy agencies – an independent central bank, independent regulatory agencies and even an independent tax office (known as ARA, or autonomous revenue authority, and tried in Uganda and Peru). For developing countries, it is seen as particularly important to sign up to international agreements – for example, the WTO agreements, bilateral/regional free trade agreements or investment agreements – because their leaders are less responsible and thus more likely to stray from the righteous path of neo-liberal policy.
The first problem with this argument for de-politicization is the assumption that we can clearly know where economics should end and politics should begin. But that is not possible because markets – the domain of economics – are political constructs themselves. Markets are political constructs in so far as all property rights and other rights that underpin them have political origins. The political origins of economic rights can be seen in the fact that many of them that are seen as natural today were hotly contested politically in the past – examples include the right to own ideas (not accepted by many before the introduction of intellectual property rights in the 19th century) and the right not to have to work when young (denied to many poor children). When these rights were still politically contested, there were plenty of ‘economic’ arguments as to why honouring them was incompatible with the free market. Given this, when neo-liberals propose de-politicizing the economy, they are presuming that the particular demarcation between economics and politics that they want to draw is the correct one. This is unwarranted.
More importantly for our concern in this chapter, in pushing for the depoliticization of the economy, the Bad Samaritans are undermining democracy. Depoliticization of policy decisions in a democratic polity means – let’s not mince our words – weakening democracy. If all the really important decisions are taken away from democratically elected governments and put in the hands of un-elected technocrats in the ‘politically independent’ agencies, what is the point of having democracy? In other words, democracy is acceptable to neo-liberals only in so far as it does not contradict the free market; this is why some of them saw no contradiction between supporting the Pinochet dictatorship and praising democracy. To put it bluntly, they want democracy only if it is largely powerless – or as Ken Livingstone, the current left-wing mayor of London said in a 1987 book title, If Voting Changed Anything They’d Abolish It.
Thus seen, like the old liberals, neo-liberals believe deep down that giving political power to those who ‘do not have a stake’ in the existing economic system will inevitably result in an ‘irrational’ modification of the status quo in terms of distribution of property (and other economic) rights. However, unlike their intellectual predecessors, neo-liberals live in an era when they cannot openly oppose democracy, so they try to do it by discrediting politics in general. By discrediting politics in general, they gain legitimacy for their actions that take away decision powers from the democratically elected representatives. In doing so, neo-liberals have succeeded in diminishing the scope of democratic control without ever openly criticizing democracy itself. The consequence has been particularly damaging in developing countries, where the Bad Samaritans have been able to push through ‘anti-democratic’ actions well beyond what would be acceptable in rich countries (such as political independence for the tax office).*
http://www.rulit.net/books/bad-samaritans-the-myth-of-free-trade-and-the-secret-history-of-capitalism-read-226653-48.html