The alliance between the free market and democracy

The alliance between the free market and democracy

Published on: 18 February 2021

In a time of increasing global protests and with the Dutch elections just around the corner, I like to look at the ‘alliance’ between the free market and the democratic rule of law.

The economists Acemoglu and Robinson discuss the economic and political institutions in their book Why Nations Fail. Those institutions can be inclusive - everyone is allowed to participate - or exploitative. In the latter case, an elite group is draining the rest in terms of prosperity or control. One of their thoughts is that economic freedom and political freedom mutually reinforce one another. My question: is it still a happy marriage?

 

Why would political and economic freedom actually go hand in hand? A part of the story is (in)equality. In a rather unequal society, rulers have to implement weightier resources in order to defend their property. Economic freedom is threatening, as it also entails more competition. And before you know it, political freedom leads to reallocation. If a country (nevertheless) develops, a middle class arises that wants participation and tries to enforce certain rights. Their success, if achieved, is also beneficial to the economy. Entrepreneurs in a democratic rule of law, have to be less concerned about someone else benefitting from their investments.

And that's how we continued to have a clear world until the end of the Cold War. You either lived in a democratic nation with a free market - and at the same time a wealthy country - or you were restricted in both your economic and political opportunities and you would be poor.

 

The major deviation from this delightfully clear picture is China. We all know that the economic rise is unprecedented. But political freedom is not particularly part of the success formula. The Dutch republic showed success in the seventeenth century - much to the dismay of surrounding monarchies - thanks to the combination of economic and political freedoms. In turn, the Chinese show the world that a lack of freedom doesn't have to stand in the way of wealth. That's an example of which you hope it will not be replicated on a large scale.

 

Yet, the question is whether or not the success has a continuing status. Migration from rural areas to the city - an important growth engine - will come to a standstill someday. And there's also another reason to doubt the durability of the Chinese model. Acemoglu and Robinson state that the combination of authoritarian leadership and economic freedom is far from stable. It can go two ways. It is possible that increasing prosperity leads to increasing participation. That means it will become a free market democracy. But it is also possible to slip into unfreedom on both fronts.

 

Even the stable alliance between democracy and the free market can be undermined. Growing inequality can feed social dissatisfaction. And the free market can generate a lot of fake news. That has been an important factor for the storming of the Capitol on January 6th. There is no economic law determining that the most objective communication sells best.

We can therefore not just expect that everything will turn out for the best once you have economic and political freedom. That's a good thing to remember in this period of election. The election programs - but also society - pay much more attention to inequality these days. That also helps in keeping the free market and the democracy together. You ask me if I have an appropriate voting recommendation when election day has arrived? Absolutely. Make sure to vote!

 

 

Charles Kalshoven is senior strategist at APG