Democratic Capitalism

The prospering of free societies depends on certain moral and cultural practices.

Published in National Review Online on September 24, 2013.

EDITOR’S NOTE: The following article is adapted from Mr. Novak’s remarks at this year’s Forum 2000 conference in Prague, September 15–18. Forum 2000 was founded in 1997 by Czech President Václav Havel, Japanese philanthropist Yohei Sasakawa, and Nobel Peace Prize laureate Elie Wiesel to consider the challenges facing humanity in the 21st century. Its focus is on democracy, human rights, tolerance, and the formation of civil societies.

For all its faults and limitations, “democratic capitalism” has one very attractive feature: It embraces many different kinds of capitalism and many different kinds of democracy. It is obvious that France is not the United States (Tocqueville recognized that in 1835). Sweden is not Italy. The United Kingdom is not South Korea. Japan is not Singapore. And so on.

When I wrote The Spirit of Democratic Capitalism in 1982, there were many fewer political economies than there are today that could be described as democratic in their political part and capitalist in their economic part. Consider the “Asian Tigers” plus the Philippines and Bangladesh in Asia, several Latin American nations (led by Chile), several of the nations formerly under Soviet control in Eastern Europe, and the many others that have emerged since the early 1980s as capitalist, but not democratic.

Meanwhile, two principles help to define the meaning of “democratic capitalism.”

(1) The first is a principle formulated by the great sociologist Peter Berger in The Capitalist Revolution: Fifty Propositions about Prosperity, Equality, and Liberty (1986). Empirical observation clearly showed that capitalism is a necessary (but not sufficient) condition for the success of democracy. Berger recognized many examples of new capitalist economies that were beginning to raise up their poor, but that could not yet be called democracies. Chile under Pinochet was one such. The Philippines, Singapore, Spain, and several significant others on two or three different continents also became capitalist before becoming democratic. Nearly a dozen nations turned capitalist, especially India and China, to pull themselves out of the worst forms of poverty. But the polity of some of these was by no means democratic. The pattern seemed to be: Capitalism first, then after a time democracy.

(2) Further consideration yielded the following modifier: In the long run, democracy is a necessary condition for the success of capitalism. Two observations led to this modification. First, under dictatorships, economic decisions have often been reached without taking account of vital constituencies such as small businesses, sectors of manufacturing deeply affected by tariffs, and companies and technologies that depend on vital links to overseas partners. The economy from then on limped. Second, even successful capitalist nations such as Singapore have been plagued by problems of succession. There was no clear institutional path for securing legitimacy among the people, with its accompanying social stability. Among investors and future partners, institutional uncertainty often hurts nations badly.

THE CHINA MODEL Some observers have asked whether China’s political economy now serves as a better model for certain aspiring nations than democratic capitalism. As it is put, that question is an empirical one, to be settled by observable evidence.

As a matter of principle, however, the Chinese leadership is betting on the possibility of sustaining economic liberty without political liberties. It is currently willing to risk its future without the checks and balances built into a republican form of democracy. I judge that this project will not be successful. Once there are a sufficient number of successful entrepreneurs, they will see that in important respects they are smarter and larger in mental horizon than the party commissars. They will resent the errors made by apparatchiks. They will demand their own representation in national decisions — that is, representative government with its checks and balances. I may be wrong about this. Empirical experience will be decisive.

Yet, notwithstanding what happens in China, the sad fact is that almost everywhere in the world today, systems properly called capitalist and democratic are facing grave difficulties. Here the crucial principle to emphasize is that the concept of democratic capitalism is threefold. Democratic capitalism is a system of political economy constituted by three relatively independent systems: the free economy, the free polity (under limited government and the rule of law), and a free system of moral and cultural institutions. The third system includes scientific and artistic institutions, plus even more basic institutions such as families and churches. And it includes all the free associations and organizations of civil society. These are the very institutions that inculcate the public virtues necessary for an inventive and creative economy, and also for a virtuous, vigilant, properly checked, and limited polity.

In this respect, the history of the last hundred years seems to have been played out in three acts. The first act settled the question whether democracy or dictatorship better protects the human rights of individuals and peoples.

The second act settled the question of whether socialism or capitalism works better for the liberation of the poor from poverty. Once they turned from their separate versions of socialism (Fabian socialism and Communist socialism), India and China between them brought more than a half-billion people out of poverty in just 20 years.

The third act, in which we are now engaged, must answer this question: Which are the most favorable moral and cultural practices for the preservation of all three systems, the economic, the political, and the moral and cultural? Which institutions are successful in inculcating the virtues necessary to the survival and prospering of free societies? The fundamental question, then, is the moral question: What is the most practical moral ecology for the survival and prospering of free societies?

THE MODEL TO FOLLOW Is democratic capitalism still a model to follow? More than half the nations of the world are still trying, but the task is very demanding morally.

For instance, more than a hundred nations of the world have discovered by experience during the past 60 years that a dynamic economy is better for the poor — for hundreds of millions of the poor, as in China and India — than either of the alternatives. Those alternatives are traditional agrarian economies and socialist economies. And at the dynamic center of the best economy for the poor are habits of the heart and mind and, to give them steady support, new institutions.

The particular habits of the dynamic economy are enterprise, invention, discovery, intelligent organization, and hard intellectual (and physical) work. The institutions that nourish such virtues include: the rule of law, private corporations (especially small ones, which create most of the jobs in the economy), open and competitive markets, rights of association, rights to an inexpensive and easy incorporation in law of new businesses, respect for private property, including patent and copyright laws to protect original ideas and compositions, and tax codes favorable to good habits that bear practical fruits.

These crucial points explain the reason why the dynamic economy that raises up the poor is called capitalism. Why? Because that word derives from the Latin caput (head), the seat of ideas and invention and discovery. Capitalism is the mind-centered system. It assists economic creativity at every turn. Under agrarian systems, wealth is counted by capita – heads of cattle, horses, sheep, goats. Under capitalist systems, it is counted by the royalties accruing from ownership in ideas, discoveries, inventions.

Notably, for example, capitalism depends on laws recognizing patents and copyrights for new inventions and works of the mind. These laws make works of the creative mind more valuable than land. Thus does the agrarian society pass into the capitalist society.

In sum, markets do not make capitalism. Private property does not make capitalism. Both of these features are as old as biblical times. They mark the traditional economy, the economy of stasis, in which the vast majority of the people are poor and have little or no way to better their condition. These are societies in which the poor have for centuries had little upward mobility.

Just as “capitalism” signifies the economic part of democratic capitalism, the word “democratic” signifies the political part. But that word “democratic” is easy to misuse. Often people mean by it “one man, one vote, one time” or, more mildly, unchecked “majority rule.” But that has often paved a highway to tyranny. As Tocqueville warned, a majority is easily seduced into a “new soft tyranny,” the tyranny of being taken care of by their masters, even if that means surrendering personal responsibility, initiative, and drive. Moreover, opponents can reason with an individual tyrant, but hardly ever with a mob.

There is a wiser meaning of “democracy,” which insists on a division of powers, interests, and factions; on the rule of law; on checks and balances; on other republican institutions such as voluntary associations and civil society; and on republican virtues that generate an alert and active citizenry. Such citizens use their own initiative to improve the common good in the areas nearest to them. This form of democracy is the opposite of a tyranny of the majority.

Within it, no one is allowed unchecked power. A system of divisions and separations is installed throughout the polity. Central power is further checked by habits of mutual restraint, peaceable negotiations, a spirit of compromise.

That last word, “compromise,” has two senses. In one sense, it means giving up on moral principle, each side taking what it can get away with. But that is a slightly disguised “rule by the strongest.” In the other sense, compromise means that each side holds fast to the moral principle it is pursuing. However, both parties agree on two guidelines for action. First, steady incremental progress is made by both sides toward a common goal. Second, neither side gets everything it wanted; each side gets some progress toward its own goal.

All sides retain respect for the others, and for the differences between them. All sides agree that, in practical decisions, the course of the future is unknown to any party. All sides also agree that the full consequences of actions are never foreseeable, with the result that each side is likely to be partly right, partly wrong. Genuine compromise means constantly renewed mutual respect, for the sake of incremental forward movement by all.

In a genuinely democratic polity, each of the parties must argue strenuously for its point of view, try to learn a little from the others, try hard to discern the point at which each side has won something, reach a compromise that each side can live with — and then put all harsh passions aside for the day, and go out and have a cup of coffee together. That’s a good day’s work!

*     *     *

What I have been trying to bring out in these brief remarks on the economy and the polity of democratic capitalism is the constitution of its third and most important part: its moral culture. For neither capitalism nor democracy can succeed without specific new virtues (virtues not often called upon in previous eras) and new sorts of institutions to support them. Thus, the moral-cultural system of democratic capitalism is more important, more fundamental, and deeper than its political system and its economic system.

Without certain virtues in the people, neither a capitalist economy nor a free polity will long endure. A free economy, for example, needs creativity, invention, self-sacrifice, and disciplined work. A free polity needs self-restraint. The first meaning of “self-government” is self-control — unless citizens can well govern their own lives individually, they cannot govern themselves as a polity. A free polity cannot long function unless there is intense cooperation among various parties. It must foster reasoned compromise, as against narrow-minded insistence on “my way or nothing.”

What is crucial about capitalism is the virtues that it inculcates and demands. What is crucial about democracy is the virtues that it inculcates and demands.

Briefly put, the third act in the history of democratic capitalism is the moral question: Granted that a people has gained economic liberty from poverty and political liberty from tyranny, what is the moral ecology necessary for its survival as a free people, its future improvement, and its prospering? A corrupt, lazy, dishonest, and decadent society cannot preserve human liberty. It will breed a nation of serfs and slaves, who do not want to carry the responsibilities of free persons, but want only to have others take care of their needs.

Rigorous reflection shows, therefore, that democratic capitalism is an exceedingly difficult model to live up to. Its costs in moral effort and moral training are formidable. That all nations fail at these preconditions in some respects is to be expected — free societies are made from poor clay such as us. But they must cultivate sufficient virtue among their people to survive and move ahead.

AN INVENTORY OF WORKING MODELS As to the question of how many different models for economic transition there now are in the world, note that compared with the years 1900, 1948, and 1980, we have today a far vaster field of empirical examples to consider. In 1900 there were not yet six democracies in the world. In 1948, the Universal Declaration of Human Rights was signed by only 48 nations.

By 1990, the worldwide icepack that had held together the socialist nations was dissolving into dozens of new “transitional societies.” Now the Middle East is alive with issues of human life and liberty. It is indeed a good time to take a new inventory, and I wholly support that idea. Experience is surely the most reliable teacher.

So far, we have learned that the first Guiding Star of these transitions is to face the truth, and not to accept lies. The second Guiding Star is to lift the poor out of poverty, so that they might exercise the mighty talents implanted within them. The third Guiding Star is to use institutions of liberty to live worthily of our human dignity, to live nobly.

What a disgrace it would be if we gained our precious political and economic liberty through the blood, sacrifice, and agonizing pain of so many millions in the 20th century, only to live as on an Animal Farm — and to allow so many millions of others to languish under tyranny and torture.

To cultivate a worthy form of moral ecology — that is the challenge we leave to the next generation. That is the challenge Vaclav Havel bequeathed all generations.

— Michael Novak’s most recent book is his memoir, Writing from Left to Right: My Journey from Liberal to Conservative. He was a founding participant of Forum 2000 in 1997 and is still active on its leadership boards.