Free markets and free societies may not go hand in hand | Economics in Plain English

Aug 29 2008

Free markets and free societies may not go hand in hand

Capitalism and democracy: friends or foes? | Free exchange | Economist.com

How Capitalism Is Killing Democracy – Foreign Policy (abstract only)

“Why is FREEDOM so important in a market economy? If people in society are not free, can a market economy truly succeed?”.

Friday’s class discussion focused on the different answers to the basic economic questions offered by centrally planned versus market economies. 

The question I left them to ponder over the weekend had to do with an apparent paradox visible in China today: that of a free market economy seemingly thriving in a society where political and social freedoms are severely limited by the communist dictatorship. It has long been claimed that free markets will be followed closely by political freedom, and vis versa. The two are thought to go hand in hand. According to the Economist.com’s blog, Free Exchange:

The late Milton Friedman emphasized that economic freedom promotes political freedom and is also necessary for the sustainability of political freedom over time. His underlying logic is that competitive capitalism separates economic power from political power. One could point to Chile, Taiwan and South Korea as examples where Friedman’s logic seems to hold.

So if, as Friedman said, free markets lend themselves to free societies, then how has China’s thriving market economy not resulted in a freer society, even after 30 years of economic liberalization? Robert Reich, writing in the Foreign Policy Journal examines the issue in some depth:

Conventional wisdom holds that where either capitalism or democracy flourishes, the other must soon follow. Yet today, their fortunes are beginning to diverge. Capitalism, long sold as the yin to democracy’s yang, is thriving, while democracy is struggling to keep up. China, poised to become the world’s third largest capitalist nation this year after the United States and Japan, has embraced market freedom, but not political freedom. Many economically successful nations ”from Russia to Mexico” are democracies in name only. They are encumbered by the same problems that have hobbled American democracy in recent years, allowing corporations and elites buoyed by runaway economic success to undermine the government’s capacity to respond to citizens’ concerns.

Of course, democracy means much more than the process of free and fair elections. It is a system for accomplishing what can only be achieved by citizens joining together to further the common good. But though free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities of income and wealth, heightened job insecurity, and environmental hazards such as global-warming.

What can explain the recent divergence of capitalism and democracy in countries like China, Russia and Mexico? The Free Exchange blog explains:

The cause of this divergence, Mr Reich contends, is that companies seeking an advantage over global competitors have invested increasing amounts of money in government lobbying, public relations and bribery. This process of corporations’ writing their own rules has weakened the ability of average citizens to have their voices heard through the democratic process.

So it appears that as capitalism and free markets have flourished, freedom of the individual has been trumped by freedom of the corporation to lobby and thus influence government into creating favorable environments for investment and growth, often times at the expense of society’s health and the best interests of the public as a whole. We will learn a term for this kind of activity in AP and IB Economics: rent-seeking behavior.

As firms grown larger and industrial and commercial power becomes concentrated in powerful multi-national corporations, the priorities of governments seem to be shifting away from individual freedoms and civil rights and towards the interests of the corporate world, whose money and influence run deep through the veins of the world’s governments.

So perhaps I was wrong. Maybe Milton Friedman was wrong too. Perhaps the 21st Century has bred a new relationship where free market capitalism is wed not to democracy, but to a new kind of corporatocracy, a term used by Noam Chomsky, in which governments bow not to the will of the people they govern, rather to the pressures from corporate entities. Freedom and justice for all (firms, that is). Gives you something to think about, huh

Discussion Questions:

  1. Do free markets lead to free societies?
  2. Is political freedom a prerequisite for a successful market economy?
  3. Has “corporatocracy” surpassed democracy as the dominant influence in the rich, developed countries of the world?
  4. In what ways could economic strength come at the expense of individual freedom?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

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