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October 2006

Free Markets and Democracy


            For most American analysts...the market and democracy are absolutely inseparable; China seems to dissociate them with stunning success.

            Erik Israelewicz, in an interview with Valéry Giscard d'Estaing, Le Monde 23 February 2005

            The neo-liberal utopias have this in common: they dissolve politics in economics.

            Vincent Valentin, Les conceptions néo-libérales du droit (Economica, Paris, 2002), part III, ch. ii

            Capitalism is a democracy in which every penny represents a ballot-paper.

            Ludwig von Mises, Socialism, an Economic and Sociological Analysis, tr. J Kahane (1931), p 428

            Despite the evidence, free-marketeers assure us that democracy and deregulated markets are inseparable. But one can argue that the are incompatible.

            A tiresome refrain

            We hear it repeated ad nauseam. Libertarians insist that democracy and free markets go inevitably together, that we cannot enjoy the one without accepting the other. For the free-marketeers, this is a good way of persuading us to tolerate their policies, even if we do not welcome them. The propagandists are too infatuated with their doctrine to be concerned with its historical accuracy. In fact, as we shall see, there are many gaps in their argument.

            First, it is clear that free markets can exist in the absence of democracy. In our own times we see largely deregulated capitalism in action in China and Singapore; Chile under Pinochet was a notorious example of Thatcherite policies. But perhaps the best example in modern history is Britain itself. In the land of Adam Smith and David Ricardo, the free-market dogma they preached was already dominant by the end of the 18th century. It remained so through the following century. However, as a matter of practical policy, there was a gradual move away from that dogma in the later 19th century, and it was effectively abandoned in the 20th, soon after Britain had acquired the full attributes of modern democracy.

            Second, democratic states are not necessarily run on free-market lines. After world War II, most West European economies were more or less distant from the free-market model; France was perhaps the furthest removed of all.

            Britain in the nineteenth century

            The first decades of the century saw the high-water mark of the libertarian economic doctrine of Smith and Ricardo.

            The Combination Acts of 1799 and 1800 attempted to outlaw combinations of employees (trade unions) and associations of masters (guilds). In 1814, justices of the peace (local magistrates) lost their historic right to regulate wages. Foreign trade was still subject to tariffs, but a vigorous free-trade movement gathered strength in the 1830s, resulting in the abolition in 1846 of the Corn Laws, which had imposed tariffs on imported grain and other foodstuffs. The guilds, which had regulated traditional crafts, lost their privileges. New industries escaped regulation until the various Factory Acts gradually prohibited excessive working hours, employment of women and children in coal-mines etc. These Acts were passed throughout the 19th century, but their effectiveness was limited until the 1860s.

            Was the Britain of that period democratic? Sure, it was ruled by an elected Parliament; but the number of electors was tiny. Only (1) about 2% of the population was eligible to vote before the Reform Act of 1832, passed by the government of Earl Grey, whose tea we still drink.

            The pre-reform electoral process was bizarre. In some constituencies the local landowner could nominate a member of Parliament without any vote. Indeed, in the 1826 election, there was no voting at all in Scotland. Other constituencies had very few electors, and they were readily bribeable: the expenditure of a few thousand pounds would buy all their votes (2). In general, the old rural constituencies were over-represented at the expense of the new industrial towns. These anomalies were so serious that (2) it has been estimated that less than a third of the whole Parliament was returned by a comparatively free vote of the electors. Even after Grey's reforms of 1832, the electorate (1) was less than 3.5% of the population. The purely hereditary House of Lords still had considerable power. And no woman could vote.

            So the political system was very far from being democratic in the modern sense of the word. Not until Gladstone's reforms of 1884/85 were most adult men eligible to vote; women were not fully eligible till 1928. That is to say, shortly before the near-abandonment of the free-market model during and after World War II.

            Post-war France

            Here is a fine example of a situation diametrically opposite to that of Britain in the Napoleonic era: a democracy whose successful economy had little in common with the free-market ideal.

            In 1944, General de Gaulle's provisional government faced a devastated economy, deficient in manpower, infrastructure, materials, even food. The rate of inflation reached 30% in 1945. However, by September 1958, when de Gaulle, restored to power following the crisis of 13th May, had the constitution of the Fifth Republic approved by referendum, a near-miraculous transformation of the economy had been achieved (3). Growth of the gross domestic product averaged 4.6% over the years 1950 to 1959. The period 1960 to 1973 was still better, with average growth of 5.5%.

            This remarkable recovery was achieved under a régime which would horrify any economic libertarian today. Even before the war, France had many state-controlled enterprises, including the post office, the tobacco industry, two major banks (Crédit Foncier and the Caisse des Dépôts), the transatlantic shipping line (Compagnie Générale Maritime), the railways and Air France.

            After the Liberation of 1944, the following were nationalized, among others: SNECMA (manufacturer of aircraft engines), Renault, the coal, electricity and gas industries, the Banque de France, three leading commercial banks and eleven insurance companies. Furthermore, a whole arsenal of interventionist practices was installed. There were state controls on wages, prices, credit and rents. And one national economic plan followed another: le plan Monnet, le plan Hirsch, le plan Massé…

            Despite all that, France was a democracy - and an increasingly prosperous modern economy with full employment. So let us stop listening to those free-market obsessionists who will trundle out any argument, however flimsy, to convince us that their policies are the only good ones.

            Libertarianism threatens democracy

            Despite the evidence, free-marketeers assure us that democracy and deregulated markets are inseparable. But one can argue that the are incompatible.

            Libertarians want to take as many powers as possible away from the state, and hand them over to the market. Primarily because many of them simply detest the state. For example, Friedrich von Hayek was anti-statist because of his disgust with the fascist and communist monstrosities that ruled much of Europe in the early 20th century.

            But the libertarians also have a quite different motive: they believe that the market is more efficient than the state. They argue that you vote in the polling-booth only once every few years, but you vote in the marketplace every time you spend any money. As their idol Ludwig von Mises put it (he was Hayek's teacher), capitalism is a democracy in which every penny represents a ballot-paper. So they want as many decisions as possible to be taken by the market rather than by politicians. The market reacts more quickly and efficiently to the wishes of consumers. As for the wishes of producers (workers of all kinds), from the libertarian standpoint these are of little importance. Adam Smith said it all (4): the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumers.

            Thus, in the land of the libertarians' dreams, the powers of the state are minimal, while those of the market are effectively unlimited. The government can still be elected by democratic procedure; but the powers of citizens as electors are very limited, since the government they elect has been deprived of most of its powers.

            On the other hand, the powers of the citizens as consumers are dominant. The problem: in politics, each citizen has one vote; while, in the marketplace, citizens' purchasing power is very unequal. The democratic polity works on the principle of one person, one vote; the marketplace, on that of one dollar, one vote. You call that a real democracy?

            A society governed by the principle of one dollar, one vote will increasingly serve the wishes of the most affluent rather than the needs of the poorest. It will suffer persistently growing inequalities, as in fact we see today in countries that have recognized, to a greater or less degree, the sovereignty of the market. This is a vicious circle. Such a society may remain democratic in theory, but it will grow less and less democratic in practice, since it will be increasingly dominated by the affluent elite, while the powers of its elected government weaken.

            The French legal academic Vincent Valentin describes the situation well: the utopias of the libertarians have this in common: they dissolve politics in economics…the minimal state is an arrangement which aims to offer individual self-fulfillment purely through the cult of independence; which is why its plans for reform lack a properly democratic dimension…

            Those who dislike well-developed, protective, regulatory states are often attracted by the libertarian dream of a society ruled by the free market rather than by state bureaucracy. Alas, in reality their dream would turn into a nightmare.

            * * * * *

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            (1) Frank O'Gorman, The Long Eighteenth Century (Arnold, London, 1997), pp 322, 369, 376

            (2) E H Carter & R A F Mears, A History of Britain (Oxford, 1948), chap. xxxvii

            (3) Jean-François Eck, Histoire de l'économie française depuis 1945 (Armand Colin, Paris, 1998), p 3

            (4) Adam Smith, The Wealth of Nations (1776), book IV, chap. viii

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