Are Democracy and Capitalism Compatible?
Probably the living thinker (and doer) whom I admire the most (after Reihan!) is Peter Thiel. Of course, Thiel is most famous for co-founding PayPal and now being a very successful investor with a winning hedge fund and venture capital firm.
As a wantpreneur and financial amateur, I obviously admire his business record, but Thiel (a philosophy student in college) is also a tremendously smart “big issues” thinker. (By the way, why doesn’t he have a blog!)
I even read his (slightly juvenile but, like everything Thiel touches, brilliant) book The Diversity Myth. When I saw a video of him mentioning and commenting on the old French classic The American Challenge I was positively giddy with excitement. His talks on the financial crisis over at BigThink is one of the most illuminating takes on the financial crisis out there.
Most recently, Thiel, a hardcore libertarian, has a post up at Cato Unbound (also one of my very favorite locales on these interwebs) arguing basically two things:
- Democracy is not just incompatible with capitalism but just not very good, basically because the losers will use the political system to tax the winners into submission ;
- Libertarians need to give up on politics, and society basically, and build their own libertarian havens, be it in cyberspace, outer space or through seasteading.
Even though I think there’s a ton of truth to Thiel’s take on the global economic meltdown, I think he’s wrong on that score.
I should say at the outset that I’m no enemy, quite on the contrary, of “far out” ideas. After all, I favor the abolition of prisons, schools, museums and retirement, I believe Nairobi should be a bigger startup hub than Silicon Valley a generation from now and, like Thiel, I like to think there’s a chance I’ll live to 3,000. But I’m afraid I will have very conventional objections to Thiel here.
The question of the compatibility between democracy and capitalism I think is a real one, but can also be overstated (I do think there’s a problem with the compatibility between libertarianism and democracy, but that’s another fight for another day).
I’m afraid that the only way I can make my point is through the old, tired trope that democracy is the worst regime at the exception of all others. Yes, democracy lends itself to boneheaded redistribution, and ham-fisted government interventions into the economy. But authoritarian regimes don’t? Even personal freedoms aside, even the most capitalist-friendly regimes are actually not so capitalist.
If you look at China, there are large amounts of unleashed capitalist fury, so to speak, but it is always within a government-managed system. A French businessman living in China compared Chinese-style capitalism to L’Oréal: you have several business units competing with each other, but at the end of the day, they’re all part of the same P&L. The fate of Huang Guangyu, once China’s richest man and now disappeared, should give pause to authoritarian-attracted libertarians. Mirabeau once famously described Prussia as “an army with a state” as opposed to a state with an army, but I’m not sure how he would describe China’s endlessly blurred mash of army, Party and business.
Singapore probably has the smartest, leanest, business-friendly policy environment, much admired by this proponent of “small, smart government,” which is obviously made possible by the city-state’s scrupulously refined form of (not so) soft authoritarianism. But the Singaporean state also owns all of the real estate in the country and is a fan of industrial policy, whose more nasty effects are softened by the country’s very smart and nimble policymakers but should, again, dampen libertarian enthusiasm for technocratic government. A business professor and Asia expert used to tell us about Singapore’s response to the lack of the kind of open innovation and risk-taking we see in the US: a massive publicity campaign involving posters with the word “THINK.” The government orders you to think for yourself! Ahem.
Conservatives frequently deride the European Union as an undemocratic technocratic pseudo-super state, but the reality is much more complex. It’s true that we have to thank the EU’s “undemocratic” elites for the (relative) liberalization of Europe in the past decades, without which we would be even further behind. But in reality, bodies like the EU commission are actually very democratically accountable — to EU governments’ elected leaders, who rely on them to make the tough decisions and then act as a political lightning rod.
Megan McArdle is very happy that Ben Bernanke, unelected and unaccountable, has a bigger role in the response to the financial crisis than Maxine Waters, and is only able to take the dramatic steps he is precisely because he is unaccountable, and so am I. But — and I realize this is a cliché, but an unescapable one — even if you have the smartest technocrats running the country today, what about their successors, and their successors’ successors? The historical record of unelected governments in this regard is not very good.
Democracy is not so much about electing people as having a process and a system of checks and balances that ensures that basic rights are protected.
No democratic country is as pro-free market as Thiel, or myself, would like, but I would wager that no authoritarian regime is better than the democratic alternatives on that score, and will remain so for the foreseeable future. Furthermore, I would wager that even though no democratic country is as pro-free market as is advisable, they are still headed (slowly, so slowly) in the right direction. Even after the financial crisis, the political consensus is still much more pro-free market than it was 40 years ago. Politics is messy, it moves slowly, in fits and starts, with one step forward and two steps back, and there are real problems with financial regulation only happening in the aftermath of crises, but I still like it better than the alternatives.
As far as potential libertarian escapes are concerned, I’m afraid I also have to be (mostly) bearish.
Thiel mentions three possible avenues: cyberspace, outer space and seasteading.
I actually agree with Thiel on cyberspace:
In the late 1990s, the founding vision of PayPal centered on the creation of a new world currency, free from all government control and dilution — the end of monetary sovereignty, as it were. In the 2000s, companies like Facebook create the space for new modes of dissent and new ways to form communities not bounded by historical nation-states. By starting a new Internet business, an entrepreneur may create a new world. The hope of the Internet is that these new worlds will impact and force change on the existing social and political order. The limitation of the Internet is that these new worlds are virtual and that any escape may be more imaginary than real. The open question, which will not be resolved for many years, centers on which of these accounts of the Internet proves true.
I agree with him on the tremendous potential of the internet to bring about change to the world, and that whether this change is more real than virtual is a question that will be answered over the long term.
As for outer space, Thiel believes that
[b]ecause the vast reaches of outer space represent a limitless frontier, they also represent a limitless possibility for escape from world politics.
and that seasteading opens a space
[b]etween cyberspace and outer space [where] lies the possibility of settling the oceans.
I think this is naive because, to put it simply, escaping world politics is not escaping politics. Wherever there is more than one man, there will be disagreements about how to live, how to allocate resources, and these disagreements can only be resolved through politics or violence, and for many issues (pollution, defense…), mere libertarianism has few answers. Presumably the idea is that seasteading communities will compete with one another for inhabitants and thus will have to downshift to a “lowest common denominator” of live-and-let-live libertarian political consensus.
Humbug!, I say. Nation states already compete for citizens, and yet we still have Zimbabwes and North Koreas. I would argue that this competition has already produced countries that are much more open and free than, say, 75 years ago, but to think that simply opening up seasteads will lead to libertarian utopias is, in my view, hopelessly naïve. The same reasoning can be applied to settling outer space. It’s something I very much look forward to but I have little hope for libertarian utopias. Lord of the Flies, anyone?
Thiel should be wary about ham-fisted, redistributive democratic government, but I would pose to him that, for the long run, it is still the least bad alternative, and that things really are — albeit ever so slowly — moving in the right direction.
Ken McLeod worte a really good series on modern politics in space collectivly called the Fall Revoloution. THe Stone Canal is the one that deals with Anarcho-Capitalism. Super fun books.
You have done a nice job of pointing out the many fallicies here (you forgot to mention that Paypal kind of sucks performance-wise) but I have a deadline facing me so I think take a few minutes to add my brilliant take on libertarianism: It’s conceptually retarded. The pure libertarian position is that society should place no constraints on the individual. But of course this is impossible so then libertrianism has to creep up the contiuum of societal constraints until the porrige is not to hot or too cold, but just right. So it’s basic principal is there should be as few constraints on the individual as possible. Sure. I agree. We have waved a hand in a general direction that we agree might be nice to move towards. Now what? There’s nothing there. It’s like my daughter saying this morning, “I wish I didn’t have to got to school.”
— cw · Apr 14, 03:00 PM · #
That Democracy runs the danger of the poor collaborating to ever increasingly tax the rich and pardon their debts has been known since the founding of the Republic and one of the reasons we are a Republic in the first place.
But what pure Libertarians miss is the role of Religion in constraining those problematic impulses while providing for the poor as well. Look at Leviticus 19:15- “Ye shall do no unrighteousness in judgement: thou shalt not respect the person of the poor, nor honour the person of the mighty, but in righteousness shalt thou judge thy neighbor.” Yet there is also a call to charity with mandated minima, such as leaving the corners of the fields and fallen fruit for the poor. It is that type of balance that we need, yet neither pure Democracy nor pure Libertarianism will get us there by themselves.
— Andrew Berman · Apr 14, 03:48 PM · #
While your post is interesting and thoughtful I find the defense of democracy you offer to be decidedly lacking. I think that by turning to the “democracy is the lesser evil” stance you reinforce the delusion that it is best regime type no matter how imperfect it may be. Maybe instead of applying band-aids to a system that is moving “ever so slowly” in the right direction we could be better served by forming a new conception of a state that is compatible with capitalism and the American people. Just my two cents. Good post and criticism though.
— Andrew Spittle · Apr 14, 03:55 PM · #
PEG, good post. I wonder: have you read The Logic of Political Survival? It provides a very nice empirical defense of democracy.
— JA · Apr 14, 04:11 PM · #
What I have noticed is the sorts of people who seem to think they would thrive in libertarian havens of their imagination don’t much look like the sorts of people who do thrive in the libertarian havens we already have; nor do these people seem like these folks are in any hurry to exchange their place of residence for digs in any number of the actually or defacto stateless regions that currently exist.
I have read some interesting thoughts about sea-steading (but not as a way to avoid being taxed into submission.) I keep a bluewater capable boat, mostly for pleasure; but also as a hedge against black swan scenarios.
— Tony Comstock · Apr 14, 05:54 PM · #
I’m trying to think through this question. I’m inclined to think that the objectives of both democracy and capitalism are more or less attained when existing side by side, at the very least they don’t exclude each other, their “mutual interest” coincides, so to speak. At times, I have difficulty imagining a democracy having anything else but a capitalist economy.
Allow me to be tedious for a second as I develop some points.
Democracy, representative democracy, aims to satisfy the will of a given set of people. Capitalism operates on the behest of the individuals who constitute the market, and who endeavor to allot rare resources in ways they deem rational.
Many of the goods delivered by democracies are intangibles that have meaning to the people as they understand themselves in a historical sense, they’re not merely goods meant to satisfy an aggregate of identity-less individuals aiming to maximalize material gain.
Sometimes a democracy may hinder the resource-allocating mechanisms of capitalism in order to satisfy an intangible good. For instance, the ISF in France – or at an even more basic level, redistribution of wealth as a whole is deeply rooted in the mindset of many French not because of its “socialist” connotations but for its “républicain” connotations going way back to 1789. Redistribution is not just a means of providing for tangible goods, more money for the poor, but also a means of satisfying an intangible good – being true to the founding principles of the French republic – “égalité” (this is the thinking of many on the Left, not mine, btw).
Just as well, capitalism can cause headaches for the smooth running of a representative democracy since the “market” often needs to correct itself – which is to say that the big players, who are as rational and irrational as anybody else, well, they’ll invariably f*ck things up, and then the little guys get p*ssed on when the economy worsens, and then the tensions between haves and have-nots get worse, causing strains on the institutions of representative democracy.
btw, I’d be curious to see how one reconciles the Catholic faith and libertarianism…
— JB · Apr 14, 10:38 PM · #
peter thiel is a winner. Who else are winners? The previous owners of skype and stumble upon. The losers? The shareholders and employees of peter’s former company,ebay. Maybe the winners can go sea steading together? Can i suggest the indian ocean ?
— wren · Apr 15, 01:59 AM · #
cw:
Well, it’ sucked since the acquisition. Back when it was still a startup it was a great service with tons of potential. Nowadays it’s sort of languishing but that’s because eBay management is not very good.
I wouldn’t be so brash. After all you can boil down liberalism and conservatism as well to a few general mottos that have little practical meaning.
My post wasn’t an attack on libertarianism, or even on Thiel, but on some aspects of his post.
Andrew Spittle:
Well if you have a magic recipe you’d like to share, by all means, don’t leave us in the dark.
JB:
I very much agree with that. In fact, I think it’s no coincidence that, even though you have dictatorships that have (pseudo-) capitalist economies, you don’t have any historical example of democracies with a command and control economy.
I agree with the general point you’re making, if I understand it as meaning that democratically elected governments can do things that are economically unwise for (what is perceived as) a greater moral purpose. And I actually think there’s nothing wrong with that in principle.
To quibble with the history, I don’t think the redistributionist features of the French society date back to 1789. The French revolution, much like the American one, was ignited by a tax revolt, from the bourgeoisie who were the most economically productive but paid a disproportionate share of taxes because the aristocracy was exempt (and thereby subsidized by the bourgeoisie). La Fayette, Tocqueville and the other “intellectuals” of the French revolution were very much economic as well as social liberals. I think the redistributionist thing comes from WW2, and the role of the Communist Party in the French Resistance and in the ensuing social and political bargain.
Since the conservative opposition was a colbertist one, ie statist, the common enemy was capitalism. Add to that the fact that we’ve never really recovered from 1968 and the fact that France was “not a nation that built a state but a state that built a nation” and you’ll be closer to understanding the French distaste for capitalism than by looking at 1789. The “Egalité” in Liberté, Egalité, Fraternité, stood for equality of rights, i.e. no taxation without representation.
I’d say the redistributionist thing is both more recent (1946, 1968) and older (Philippe Le Bel seizing the property of the Knights Templar).
This is something I often think about, since I often describe my politics as “John Paul II + Milton Friedman.” I like to think two things.
First of all, I sincerely believe that free market capitalism is not just a great engine of economic efficiency, but also of social justice. The victims of France’s two-tiered labor market aren’t people like me with great education and well-off, well-connected families. They’re “the little guy,” the guy who dropped out of college because there were 1200 people in his class, and who can’t get a long term employment contract. He’s the one who’s screwed by the welfare state, not me. And if the tax/regulatory burden gets too heavy, I can always move to another country. So free markets (and technology!) work out for the little guy, and therefore provide social justice. Social justice is really something I think about a lot for a free market guy, and I really think social justice properly understood and free market capitalism properly understood (as opposed to big business corporatism) are very much compatible.
Second of all, we know that until he was 30, Jesus was a carpenter. I like to think he was an entrepreneur and small business owner, and that he very much approves of entrepreneurship. :)
wren:
I agree that the Skype and StumbleUpon acquisitions were boneheaded, but I do think there were/are huge synergies between PayPal and eBay and that the acquisition of PayPal was a good thing for eBay. Now eBay is not a very well managed company, but you can’t blame the PayPal founders for the fact that eBay didn’t push the business to its full potential.
I sometimes think about an alternate future where PayPal continued as a standalone company and became the world’s global payments/banking system, and maybe the investing public (since PayPal was public at the time of its acquisition) would have benefited from having the two separate companies, but I still think, back in 2002, acquiring PayPal was the right move for eBay and its shareholders.
— PEG · Apr 15, 11:05 AM · #