Capitalism and Democracy

Capitalism and Democracy

A Fragile Alliance

New Horizons in Institutional and Evolutionary Economics series

Theo C.M.J. van de Klundert

Capitalism is driven by technological revolutions, leading to alternating periods of regulation and deregulation in leading economies. Technologically backward countries face a different situation as they have to catch up with the leaders. Against this backdrop, Theo van de Klundert examines the relationship between capitalism and democracy, combining economic theory and historical description to analyse long-run economic development. Emphasis is placed on the interrelation between economic and political power, and a robust state-of-the-art overview of today’s political economy is presented.

Introduction

Theo C.M.J. van de Klundert

Subjects: economics and finance, economic psychology, institutional economics, political economy

Extract

Iversen’s question takes a central place in our book. The friction between capitalism and democracy can be explained as follows. Capitalism generates strong inequalities in the distribution of income and wealth, while democracy divides political power in an egalitarian manner, under the principle of one person, one vote. The majority may vote in favour of redistributing income, and maybe wealth, from the rich to the poor. But then the rich will resist by disputing the political power of the majority or by curtailing their economic efforts. The consequences of such a struggle are serious and may influence the viability of the capitalist system. There is another aspect in the quotation above that needs attention. Iversen refers to political economy but in economics, as the discipline is usually called, there is no attention to the distribution of income and wealth. In the dominant neoclassical theory emphasis is on the efficient allocation of the production factors, taking account of the preferences of economic subjects. Who owns these factors and receives the factor incomes is irrelevant in this theory.