Does Capitalism Cause Democracy?


Do free markets lead to freedom? Or at least freedom defined as being able to vote politicians out of office? A lot scholars and others (me, for example), have believed that free markets produce a middle class which then demands more freedom and democracy. Evidence for this virtuous circle exists in the cases of South Korea, Taiwan, Brazil and so forth. The idea is that irredentist authoritarian states will eventually fall before a triumphant globalization.

Today's New York Times publishes an interesting article questioning this supposed dynamic. The article points out,

When President Bush declared last week that political openness naturally accompanied economic openness, his counterparts in Beijing and Moscow were not the only ones to object. Liberal and conservative intellectuals, even once ardent supporters, have backed away from the century-old theory that democracy and capitalism, like Paris Hilton and paparazzi, need each other to survive.

From China, where astounding economic growth persists despite Communist Party rule, to Russia, where President Vladimir V. Putin has squelched opposition, to Venezuela, where dissent is silenced, developments around the world have been tearing jawbreaker-size holes in what has been a remarkably powerful idea, not only in academic circles but also in both Republican and Democratic administrations — that capitalism and democracy are two sides of a coin.

So is it time to give up on the theory that free markets lead to liberty? I don't think so. Why?

Because as the Times article also notes,

The belief was that rising incomes would create a middle class that would agitate for personal liberty and political power. The tipping point seemed to occur when per capita income reached somewhere between $6,000 and $8,000. True, there were exceptions like tiny Singapore with its growing wealth and one-party state, but they were often dismissed as too small or transitional to really put a dent in the theory.

First, Venezuela and Russia are not good examples of "capitalist" countries. To the extent that their "economies" are growing, they are largely being fueled by high oil prices, not because their citizens are being allowed to invest, work hard, and own property.

Secondly, have these countries reached the per capita income tipping point? According to the CIA World Fact Book, Venezuela's per capita income on purchasing power parity basis is $6.900; Russia's, $12,100; China's, $7,600. To the extent that these countries have reached the democratic tipping point, they've only just arrived.

Looking at the GDP per capita data one finds that, for the most part–with the notable exception of oil autocracies (and Singapore)–countries at the top of the GDP per capita rankings are, in fact, democracies. Thus I conclude that the theory that capitalism leads to liberty is far from being disproved.


Disclosure: I freely confess to being a penurious shill for Big Free Markets (the bigger the better) and Large Liberty (the larger the better).