Capitalism, Socialism,
and Democracy
Coherencies and Contradictions
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Capitalism & Democracy
Inherently linked?
 No!
 Capitalism also linked to non-democratic
regimes (e.g. China).

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Socialism & Democracy
Mutually exclusive?
 No!
 Most European Countries are “social”
democracies not to mention that the
United States has many elements of social
democracy.

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1) Democratic Capitalism

Capitalism= Economic system based on
private property and free markets.
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Traditional Capitalism

1.
2.
3.
4.
5.
Also known as: “Free Market” or “laissez-faire”
Capitalism and has five components:
Private ownership of property
No legal limit on accumulation of property.
Free Market-no government intervention in the
economy
Profit motive as driving force.
Profit as measure of efficiency
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Adam Smith (1723-1790)

1.
2.

1.
Intellectual Father of Capitalism who
said:
Humans motivated by self interest.
Should be free to pursue profits.
Result: “The Invisible Hand.”
Efficient economic system; all will benefit
because goods will be produced and sold
cheaply.
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Capitalism Vs. Feudalism
Capitalist entrepreneurs had to organize to fight
against the system of their time, Feudalism.
 Feudalism was the economic system derived
from Monarchical and Aristocratic society.
 Serfs or Peasants were allowed to work the land
but a percentage of their labor went to the king,
noble, or lord who owned the land.

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Capitalists as Radicals
Feudalism was inefficient, did not promote
economic growth because there was no
private property.
 Capitalists organized, started social
movements based upon the ideas of Adam
Smith: Private property, government nonintervention.

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Late
th
19
and Early
th
20
Century
Changes to capitalism as a result of
criticism.
 Some regulation of the economy

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Mixed Economy:
Rise of the Welfare State
Main Catalyst: The Great Depression
(1929-1941)
 Key Presidents: FDR, LBJ, and Nixon.
 Specific areas: retirement, health,
unemployment, education.

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Arguments for Mixed Economy

John Maynard Keynes (1883-1946):
argued that depressions can be avoided if
government pumps money into the
economy to eliminate unemployment.
Also argued for government role in
building a social security system and
regulate business.
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Who Else uses Mixed Economy?
Japan, most European countries built
welfare states.
 Why?
 Eliminate antagonistic relationship
between business and labor through
government mediation = corporatism.

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Welfare System

1.
2.
Two types of assistance:
Need-based: Food stamps, aid to families
with dependent children, unemployment.
Non-need based: pensions, social
security.
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Response to criticism:
Welfare system does give away money.
 But, they are supposed to ease tension
and inequality.

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Perpetuates Dependence
May be true to some extent, but what is
the alternative?
 Minimum wage jobs?
 Supposed to help people subsist at a
minimum level.

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1980s & 1990s
Return to free market principles (Reagan).
 Dismantling of Welfare state.
 Cut taxes.
 Massive Government Debt.

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Capitalists & Democracy
Capitalists argue that democracy requires
capitalism because of freedom to
accumulate.
 Private property is highest value
(economic freedom).
 Economic freedom exists when
government and monopolies are checked.

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Monopolies
Give too much power to business (J.P.
Morgan).
 Reduce competition (Bill Gates).
 Eisenhower’s warning: Military Industrial
Complex; creation of a power elite
(military, corporate, government).
 Result: Collusion of Interest

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Economic Freedom
Problem for small businesses?
 Many hurdles.
 Working hard often not enough.
 Problem of equality of opportunity (race
and gender barriers).

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Critics of Democratic Capitalism
Focus on extremes of poverty and wealth
 And, Influence of wealth on political
process
 And, Power differentials between
employers and employees.
 They say: capitalism produces inequality
of wealth and power.

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The answer:
Private property must be checked.
 What are the effects on the community if
not?
 Outsourcing, factory closures
 Must be accountability of economic power
to the people (political power)

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Too much Capitalism
Results:
 Profit motive strengthens selfishness
 Loss of community values of cooperation
 Free Market allows rich to accumulate
without responsibility to community
(Multinational Corporations).
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Democratic Socialism
(Social Democracy)
Characterized as follows:
much property held by the public through
democratically elected government, including
major industries, utilities, and transportation
systems;
b) a limit on the accumulation of private property;
c) government regulation of the economy;
d) extensive publicly financed assistance and
pension programs;
e) social costs added to financial considerations
as measure of efficiency.

a)
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History of Socialism

1.

Response to the Industrial Revolution
Working conditions, living conditions,
pay.
Christianity: sharing, community,
cooperation.
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Revolution or Evolution?
Marx argued for revolutionary transition to
socialism (communism) through workers’
revolution.
 Later, others argued for reform through
elections.

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Assumptions
Citizens ought to control political and
economic life.
 Should be democratic accountability.
 If people control economic system then
more equality and less poverty will follow.
 Limited Private Property. Socialists are not
against private property, but are in favor
of government regulation.

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Government and Economy
Monarchy
 Aristocracy
 Democracy

(one)
(few)
(many)



Dictatorship
Oligarchy
Tyranny
Free Market (Pure form: Market rules)
 Democratic Capitalism (hybrid)
 Democratic Socialism (hybrid)
 Command Economy (pure form: State rules)

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Socialism and Democracy
Politics and economics are connected.
 People should decide the direction of the
economy.
 Community should benefit, not just a few
individuals.

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Continued
Profit motive (self-interest) goes against
the interests of the community.
 Liberty requires economic security
(remember “positive liberty”).

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Continued




Welfare/Social Security (high taxes on rich):
Typical democratic socialist welfare system
(Sweden) includes extensive medical care
system (free or minimal costs), prenatal care
for expectant mothers, sabbatical leave for
mothers (full pay);
unemployment benefits and retraining
programs, free public education;
workers’ representation on boards of
corporations; rent subsidies.
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Criticisms
Problem of bureaucracy, accountability.
 High cost
 Corruption

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Response
Ombudsman: hears complaints about
bureaucracy
 tries to correct inefficiencies, corruption
etc (like an “independent commission”).

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More Criticisms



Free market of competitive capitalism is
essential for efficient production and
distribution of goods.
Interference with free market through
government ownership and control puts too
much power in the hands of government
destruction of freedom and democracy but
the electoral process is still there.
Human Nature acts against socialist idealism.
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Current Trends

Supply-side economics argues that
government should only control the supply
of money in the economy to keep inflation
low government borrowing main source
of inflation (monetarism).
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More Trends
Welfare policies drain money from private
investments (taxes) that would otherwise
create more jobs reduction of
government spending.
 Problem: unemployment, social inequality.
 Socialists argue that social costs must be
included in cost of doing business.
 Problem: profits.

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Other Socialist Ideas
1.
2.
3.
4.
5.
Market Socialism or “Third Way”
Developmental Socialism
Economic Democracy
Communal Living
Cooperatives
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Recent Policy Issues:



Deregulation: Enron, Anderson
Relinquishing government oversight of
the economy. Core idea: over regulation
has forced inefficiencies on the
economy correction is needed.
Problems: 1) lowering of health and
safety standards for workers; 2) Savings
and Loan disaster; 3) product quality
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