A Fragile Alliance
New Horizons in Institutional and Evolutionary Economics series
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.