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:

  1. 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 ;
  2. 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.