Democracy and Capitalism

The merits of democracy are in dispute. Most people probably believe that democracy is the best institutions of governance that we have to choose from. Of these, the majority seek improvements on the margin: a stricter adherence to some intertemporally flexible constitution of rules (e.g.public choice theorists, see Democracy in Deficit), a greater concern with social justice, et cetera. Some have much deeper criticisms of democracy and have in mind much more radical improvements in governance — see, for example, The Myth of the Rational Voter and “The Irrelevance of Economic Theory to Understanding Economic Ignorance.” A minority even take a backwards-looking perspective, arguing that institutions like monarchy are superior to democracy, because those with long-term interests in the survival of their dynasty are more likely to implement less extractive policy.

One major, if not the, leader of the school of thought that supposes monarchy to be superior to democracy is Hans-Hermann Hoppe. Two “must read” pieces of his on this topic are “The Political Economy of Monarchy and Democracy, and the Idea of a Natural Order” and “Time Preference, Government, and the Process of De-Civilization.” I’ve commented on Hoppe’s thesis before, and I’ve clashed with some readers, but while reading Sebastian Edwards’ Left Behind, I ran across a very concise argument as to why Hoppe is wrong,

Left Behind (Edwards)It is important that property rights are protected for all citizens and not only the elite. In that regard, a greater degree of democracy will tend to encourage efficiency and productivity growth.

— p. 13.

While there is reason to grant the notion that for-life rulers have an interest in preserving power, it’s a non-sequitur to jump from here to the conclusion that monarchic policy is therefore better harmonized with the rest of society’s ends. The truth has historically been the exact opposite, largely because conservation of power rarely requires fast paced economic growth. In fact, growth brings change, and change is oftentimes counterproductive for the ends of an absolutist regime. Daron Acemoglu’s and James A. Robinson’s Why Nations Fail gives specific examples — although, as an aside, I think the book contains a few contradictions —, but the logic is somewhat intuitive. Economic growth typically brings about changes in the distributions of wealth and power, away from absolutist institutions.

To “prove” his argument, Hoppe compares tax rates between the two kinds of institutions. “Compares” may be too strong of a word, because it’s actually an assertion. But, even if democracies, on average, implement higher tax rates, taxes aren’t the only policy relevant to economic growth. While in absolute terms the number of protected industries has probably risen, by merit of economic growth and an increase in our productive power, as a ratio economies ruled by democracies tend to be relatively freer. We don’t necessarily need to construct an intertemporal comparative static, we have plenty of current regimes that fit the two roles. Economically weaker nations, with more absolutist regimes, usually do not levy income tax and other duties on their citizens. Instead, they rely on tariff walls. Tariff revenues are usually more lucrative, because their populations are so impoverished that local tax collection doesn’t accrue sufficient income. We hardly consider these regimes more optimal than democracy, despite their “favorable” tax structures.

The reason why democracy correlates so well with economic growth and modernization is because it’s a relatively pluralistic liberal institution of governance. What this means is that in democracy a greater proportion of society can take part in governing, meaning that the institutions of law and justice reflect the ends of a greater number of people. Whereas in monarchies and other less pluralistic governments it’s easier for one group to extract wealth from another, in democracy this is much more difficult, and in fact more people are protected from these kinds of predation (although, this isn’t to say that it doesn’t happen). For democracy to be superior it isn’t necessary to assume that people have better intentions. It’s that the institutions themselves are more reliable for the defense of a set of rights that people are interested in protecting.

Does democracy cause higher growth? This is a difficult question to answer. There is plenty of evidence that suggests “no.” Plenty of modern democracies in emerging markets have not brought with them greater prosperity. In part, I think that many specific versions of democracy are incomparable, because there exist institutional differences. What this suggests is that growth isn’t aided by democracy per sé, rather it’s helped by gradual institutional innovation that builds checks and balances, while increasing participation in deciding how society should be governed. It just happens to be that in the United States, Great Britain, France, et cetera, these new liberal institutions were democratic in nature. Many governments try to mimic the organization, but without the prerequisite institutional progress.

Democracy has its shortcomings. Anything that is the product of the human mind will be imperfect, and there will always be room for improvement. This is why the public choice and sister movements command a wide following. Many people want institutional changes within the framework of democratic organization. Others want more dramatic transitions. I think we ought to let society decide for itself. But, democracy is not a step back. It’s true that maybe there was a small probability that an alternative pluralistic system of governance could have arisen in democracy’s place, but I’m not sure how it matters. Democracy came about because of a striving for pluralism, and it’s this pluralism that helps people defend themselves and improve their standards of living. Within this context, democracy was absolutely crucial for the development of modern civilization.

4 thoughts on “Democracy and Capitalism

  1. Seth MacLeod

    I always thought that Hoppe’s point regarding Democracy vs. Monarchy was meant to be understood as ceteris paribus. I don’t think it’s meant to be that all monarchic policies are better than democratic policies, just that ceteris paribus, a democracy is more destructive than a monarchy.

    Aren’t the American colonies and British Hong Kong perfect examples of Hoppe’s point? Hong Kong was not democratic yet it had great economic growth. The American colonies had governors appointed by the king of England, and there was certainly capital accumulation during the colonial period.

    Isn’t it a common argument against libertarians, “If you like anarchy so much, why don’t you move to Somalia?” But doesn’t that miss the point? We shouldn’t compare anarchic Somalia to democratic America but to what it was before anarchy. Likewise, we shouldn’t compare modern Western democracies to African tyrannies.

    I would think the most devasting counterexample to Hoppe is North Korea. I suppose it’s possible that if North Korea were to become a democracy, that maybe the citizens would destroy each other’s wealth through ignorance of economics. It might be that Hoppe’s argument is correct and that they would be worse off, but I find that highly unlikely.

    1. JCatalan

      When economists use the term “ceteris paribus” it’s usually for the sake of being able to discern what the effects will be of a specific change. If you want to make the case that monarchy is better than democracy then you have to compare both in their totality. It’s not okay to make the (highly questionable) claim that monarchies will have better tax policies and then conclude that because of this monarchies are better. Other policies are also relevant. Compared in their totality, I think the evidence (both empirical and theoretical) conclusively argues against Hoppe.

      There are examples of relatively high growth economies under absolutist regimes. Pinochet’s Chile is another example, to add to yours (as an aside, local governments in English America were oftentimes pluralistic — American democracy didn’t arise out of nothing). But, the question is whether under similar conditions these economies would preform better under more pluralistic forms of governance. I think they would, and actually Chile serves as an example here, as well. Post-Pinochet Chile has grown, on average, at faster rates than during under Pinochet.

      There are different conceptions of anarchy, but the libertarian vision is a pluralistic one. If we were to rank different institutions of governance in terms of pluralism, anarchy would be on top, democracy in the middle, and monarchy third. But, yea, I agree with your point that we should be comparing institutions of governance on the same terms.

      1. Seth MacLeod

        After rereading Hoppe’s argument, I believe the fundamental problem is that his argument is thymological and not praxeological; it rests on a series of assumptions about the psychology of the monarch. His argument can only apply to monarchies where the monarch holds certain values (e.g. low time preference). Except that isn’t entirely true either, because the democratic alternative also would have to hold certain values (e.g. high time preferences). So Hoppe’s argument is only true under certain very narrow constraints. His argument is equivalent to “if only we had the right person in charge”.

        1. JCatalan

          Adding to what you write, another concern is that even if the monarch has low time preference, it doesn’t mean that his long-term interests are harmonious with the long-term interests of society in general. What coordinates the interests of various members of societies are institutions. The institutions of monarchy, history as shown, are not adequate in this sense. It’s completely possible for a monarch to have a long-term outlook, but this could be at the expense of the rest of society — as it often has been.


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