Capitalism and democracy have proven themselves the most successful systems of economic and

political order. The market has become the main mechanism for economic coordination and the
maximization of profits. Capitalism prescribes an economic system in which a nation’s trade and
enterprise is controlled by private individuals and businesses and the economy is structured in terms of
markets. The government largely leaves the economy alone and free market forces operate along the
lines of the laissez-faire model as expounded by Adam Smith and his liberal successors. Decisions are
made without central direction but the ‘invisible hand’ of the market serves to co-ordinate and control.
As a result goods and services are produced ‘much more efficiently than any known alternative’ and
long run capitalism has typically led to economic growth. By initially cutting acute poverty and improving
living standards of humanity and creating unprecedented levels of economic growth, capitalism helped
reduce social and political tensions and created social conditions favorable to the rise of democracy.

Historically, a correlation can be seen between economic growth under the rubric of capitalism and
industrialization and the rise of democratic values, and both terms are regularly encapsulated in the
concept of liberalism.

Capitalism and Democracy theoretically appear to be the two sides of the same liberal coin, both based
on the conception of human equality and complete human freedom against any form of state
intervention. Both the ideologies place individualism at a premium. They assume human beings to be
rational autonomous actors working for their self interest and consequently seek to tap the motivational
forces of human self interest in hopes of net societal benefit. There is an analogous role of consumer
sovereignty dictating the forces of the market in a capitalist system to the voter sovereignty that
dictates the formation and conduct of a government in a democracy. Both the systems seek to stress the
realization of individual capacities, preferences and individual participation. The institutional framework
of the two ideologies is understood to be responsive to individual preferences in an egalitarian manner.
Both systems encourage efficiency and optimal outcomes through competition among individuals,
political parties and private businesses.

They both share a common enemy: in the form of a strong centralized state. The main objective in both
a democratic and a capitalist system is to ensure minimal governmental interference in the private
pursuits of the citizenry. The decentralized nature in which economic decisions are made in a capitalist
economy is for Dahl the most important feature of the capitalist system that makes it compatible with
democracy because it avoids the need for a powerful central government.

Being the political and economic paradigms of liberalism, both ideologies predict the eventual
realization of a more peaceful world through the creation of a complex web of economic
interdependence between capitalist democratic states and the institutionalization of norms of
diplomacy, dialogue, and a mutual respect for human rights.

Market capitalism is also favorable for democracy because of its social and political consequences. A
large middle stratum of property owners are created, that scholars view as typically seeking education,
autonomy, personal freedom, property rights, the rule of law, and participation in government. The
middle classes are the ‘natural allies’ of democratic ideas and institutions, as Aristotle first said and the
modernization theorists like Lipset elaborated upon.

Theoretical as well as empirical analyses are showing an increasing number of contradictions however -
even incompatibilities—between capitalism and democracy. The practical operation of capitalism
creates circumstances that lead to considerable tension between the two doctrines. History has shown
capitalism had aided democracy, serving as a vehicle for a revolutionary transformation of society and
politics. It has helped bring about changes ‘from landlords and peasants to employers, employees and
workers; from uneducated rural masses barely capable of surviving… to a country of literate, moderately
secure, urbanized inhabitants; from the monopolization of almost all resources by a small elite… to a
much wider dispersion of resources’ (Dahl, 1998: 178). Once society and politics are transformed by
market capitalism and democratic institutions are in place, the situation fundamentally changes. Now
the economic inequalities that capitalism churns out produce serious inequalities among citizens.
Deregularized markets and the free operation of capitalism has continuously lead to a grossly
unacceptable degree of economic and social inequality (of income, wealth, power and life opportunities)
that is hardly acceptable in a democracy built on principles based on equal rights, opportunities and
duties. The inequalities in the distribution of economic capital are virtually reproduced in the
distribution of political capital and thus capitalist economies jeopardize the very moral foundation of
democracy.
The lower classes retreat from political participation because of rising inequalities, and their voices thus
remain unheard and unrepresented within parliament and the democratic structure.
Unequally distributed property rights and large accumulation of wealth within a few hands alongside
increasing impoverishment of the rest of the population jeopardizes the notion of equal civic rights that
democracy depends and flourishes upon. Profit oriented trade within capitalism is in contrast to the
search for the common good within democracy, which might sometimes require such measures as the
redistribution of wealth and welfare policies taken up by the state requiring some degree of state
intervention within the economy. These situations have led some scholars to believe that capitalism is
not democratic, and democracy not capitalist.

Capitalism gives immense power to private businesses which interfere in the political realm and curtail
the power of democratically elected governments. Through various means; such as political lobbying, or
through the mere threat of relocation; huge businesses such as TNCs can practically force governments,
especially those of the Third World whose economies are largely dependent upon the foreign direct
investment that these businesses bring in, to adopt policies that are in their economic interest at the
expense of parliaments and governments making policies with the people’s interest as their motive.

Capitalism creates inequalities not only at a societal but also at the international level. Global Capitalism
keeps the third world countries at an economic disadvantage and in a constant cycle of dependency.
TNCs often exploit the unstable political and economic conditions of the countries of the Global South
for their economic incentives, for example the global trade and mining of blood diamonds, and in doing
so, perpetuate a situation of turbulence and political instability that is unfavorable to the development
of democratic institutions in these areas.

During the postwar decades, tensions between the two doctrines were moderated through the socio-
political embedding of capitalism by an interventionist tax and welfare state. Yet, the financialization of
capitalism and the increased deregularization of markets since the 1970s and 80s has broken the
precarious capitalist-democratic compromise. Socioeconomic inequality has risen continuously and has
transformed directly into political inequality. The lower third of developed societies has retreated
silently from political participation; thus its preferences are less represented in parliament and
government. Deregulated and globalized markets have seriously inhibited the ability of democratic
governments to govern.

Historically, modern democracy rose alongside capitalism and, some argue, in causal connection with it,
suggesting that modern democracy is the product of the capitalist system.
The postwar decades saw an embedded form of capitalism. From the 1950s to the 1970s, capitalism was
characterized by a strict regulatory framework and the expansion of interventionist Keynesian welfare
states. This was the result of an increasingly expansive, interventionist welfare state that interfered with
the capitalist economy by regulating, stabilizing and equalizing it. A specific system of strong
interdependence developed between the state and the market, between democratic and economic
institutions and the capitalist economy. Since the 1970s, capitalism has changed in a way that has
challenged its compatibility with democracy considerably. The turn towards neoliberalism, deregulation
and globalization, and the rise of financialization has contributed to these changes significantly. There
have been concerted efforts among most capitalist economies for more deregulation and privatization,
as well as (in some countries) significant cuts in welfare benefits. The decades of “organized capitalism”
came to an end; the Anglo-American model of deregulated financial capitalism threatened to sideline
other varieties of a more regulated, continental capitalism. The main impetus came from cross-border
competition and the worldwide interconnectedness that had developed alongside globalization.
Globalization put the model of organized capitalism under enormous pressure, as it had been developed
within the context of the nation state. The regulating capabilities of strong nation states now faced the
opposition of cross-border competition. The balance between the market and the state shifted to the
disadvantage of the regulatory state and hence to the disadvantage of democracy.

The increased deregularization of the economy and political decision-making went hand in hand with
increasing socioeconomic inequalities. Together they undermined two fundamental principles of
democracy: (1) the democratic core principle that authoritative political decisions can only be taken by
those who are legitimized by constitutional democratic procedures and (2) the principle of political
equality, which is diluted by the asymmetric distribution of socioeconomic resources among citizens,
largely to the disadvantage of the lower societal classes.
The more denationalization progressed, and the more capitalism lost its social ties and turned into (neo-
)liberal financial capitalism, the more its negative effects on the quality of democracy could be
observedIncreasing socioeconomic inequality and poverty lead to asymmetric political participation.
Economic inequality
translates into social and then rapidly into political inequality. Much has been written about the
connection between the availability of socioeconomic goods and their transformation into cognitive
resources and political participation.8 It already becomes apparent in the context of the least
demanding form of political participation, namely general elections. Undeniable evidence confirms that
the lower social classes are the ones taking the political exit option, while the middle and upper classes
are the ones that stay. Deregulating markets has put a strain on the compatibility
of capitalism and democracy, and has made their incompatibilities more visible.

If these challenges are not met with democratic and economic reforms, democracy may slowly
transform into an oligarchy, formally legitimized by general elections. It is not the crisis of capitalism
that challenges democracy, but its neoliberal triumph.
Capitalism and democracy are guided by different principles that create tensions between the two.
Socioeconomic inequality challenges the core democratic principle of equality in participation,
representation and governance. The philosophical tenets of democracy and capital accumulation thus
diverge sharply. Dahl states that the democratic potential of polyarchal democracy is limited by the
inevitable inequalities that market capitalism creates, that in turn generate inequalities in the
distribution of political resources. Consequently citizens are not political equals, violating the moral
foundation of democracy, political equality.
Some scholars believe that extensive government intervention and regulation can right the inequalities
experienced. In the light of the above discussion, it is argued that the harmful effects of unregulated
capitalism should be mediated by interventionist, welfare states that interfere within the economy to a
reasonable extent to ensure employment, welfare policies and redistribution of wealth to counter
wealth accretion within the hands of the top few percents of society. Only then can the contradictions
between the two doctrines be reconciled to maintain the moral frameworks of democracy; of the ideals
of equality and equal opportunities for all.