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Capitalism, Socialism, and Democracy

Coherencies and Contradictions

Capitalism & Democracy

Inherently linked? No! Capitalism also linked to non-democratic regimes (e.g. China).

Socialism & Democracy

Mutually exclusive? No! Most European Countries are social democracies not to mention that the United States has many elements of social democracy.

1) Democratic Capitalism

Capitalism= Economic system based on private property and free markets.

Traditional Capitalism
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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

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.

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.

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.


th 19

and Early

th 20


Changes to capitalism as a result of criticism. Some regulation of the economy

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.


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.


Who Else uses Mixed Economy?

Japan, most European countries built welfare states. Why? Eliminate antagonistic relationship between business and labor through government mediation = corporatism.


Welfare System



Two types of assistance: Need-based: Food stamps, aid to families with dependent children, unemployment. Non-need based: pensions, social security.


Response to criticism:
Welfare system does give away money. But, they are supposed to ease tension and inequality.


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.


1980s & 1990s

Return to free market principles (Reagan). Dismantling of Welfare state. Cut taxes. Massive Government Debt.


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.


Give too much power to business (J.P. Morgan). Reduce competition (Bill Gates). Eisenhowers warning: Military Industrial Complex; creation of a power elite (military, corporate, government). Result: Collusion of Interest


Economic Freedom
Problem for small businesses? Many hurdles. Working hard often not enough. Problem of equality of opportunity (race and gender barriers).


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.


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)


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).


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.

History of Socialism


Response to the Industrial Revolution Working conditions, living conditions, pay. Christianity: sharing, community, cooperation.


Revolution or Evolution?
Marx argued for revolutionary transition to socialism (communism) through workers revolution. Later, others argued for reform through elections.


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.


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)

Socialism and Democracy

Politics and economics are connected. People should decide the direction of the economy. Community should benefit, not just a few individuals.


Profit motive (self-interest) goes against the interests of the community. Liberty requires economic security (remember positive liberty).



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.

Problem of bureaucracy, accountability. High cost Corruption


Ombudsman: hears complaints about bureaucracy tries to correct inefficiencies, corruption etc (like an independent commission).


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.

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).


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.


Other Socialist Ideas


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Market Socialism or Third Way Developmental Socialism Economic Democracy Communal Living Cooperatives


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