Spotlight on Chapter 1: Social trends and new geographies

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This excerpt from chapter 1 analyzes the tension between capitalism and democracy, under the light of historical trends
(This is a much compressed version of section 4 of the chapter.)

The paradox of the present

During the final decade of the twentieth century, expectations of democratization and economic globalization went hand in hand, raising hopes for reaching a fully democratic world in which all material needs would be satisfied and poverty overcome. It seemed as if political and economic progress were both well defined and unstoppably on their way.

However, economic progress has been highly uneven across regions of the world and marked by financial crises. Democratic institutions are more widespread, but some democratization efforts have failed and sparked uncontrollable violence. Furthermore, even within procedurally functioning democracies, many citizens have stopped to believe that their participation can have an effect on policy outcomes, and either turn away from politics, or express their discontent by supporting demagogues.

For all of those reasons, the diffuse optimism of the late twentieth century has waned. To assess the current situation more adequately, we need to first take a step backwards and understand how the expectation of social progress had been related to the diffusion of democracy and capitalism.

A short look at the historical experience

Ideas that closely tie the progress of humankind with the advance of democracy and capitalism arose in the seventeenth and eighteenth century, and they retain some of their relevance today.

The period from ca. 1500 to ca. 1800, which historians of Europe call the early modern times, saw the notions emerge that individual human beings have inalienable rights and that any legitimate political order needs to emerge from the agreement between those rights-holders. By the late eighteenth century, the idea of democracy incarnated political progress.

The idea of expanding commerce, in turn, also emerged in response to persistent strife, warfare and misery. While human nature could not be changed, society could possibly be transformed in such a way that social interactions are more driven by interests than by passions. Montesquieu and Adam Smith promoted the vision of the “doux commerce” as the way to the “wealth of nations”.

However, during the 19th century, class-divided societies emerged, institutional political participation remained restricted, the formal abolition of slavery happened late. In the early 20th century, the combination of extension of democracy and capitalist crisis led to an explosive situation. Demands of the population could not as easily be ignored or oppressed as during earlier periods, leading to the breakdown of democracy in many of the countries where it existed and the rise of authoritarian regimes.

 Rethinking the relation between democracy and capitalism

It is equally erroneous to think that democracy and capitalism are in basic harmony with each other as different expressions of human freedom and self-determination or to hold that they are in basic and irreconcilable contradiction with each other. Rather, there is a fundamental tension between the operating modes of them. On the one hand, democracy is the term we use for the normative idea of free and equal collective self-determination. On the other hand, the normative idea of a capitalist market economy is based on everyone’s individual pursuit of their interests, the collective outcome being nothing but the aggregate of the individual inputs.

The original arguments about “sweet commerce” and “wealth of nations” did not entail that every aspect of social life was suitable for commercialization and commodification. Trying to understand “the rise and fall of market society”, Karl Polanyi (1944) rightly underlined that a market economy needs to be consciously embedded into society, not disembedded from it, as much free-market thinking tended to hold.

After the Second World War, the democratic capitalist nation-state was seen as the answer to the tension between democracy and capitalism. It would be democratic as the expression of the collective self-determination of a nation through equal universal suffrage. It would reap the benefits of the functional efficacy of a market economy, by embedding it into the national framework through political regulation of external commerce and through domestic demand management, often to be called Keynesianism. Furthermore, taxation would be used as a means for social redistribution, paying for the building of welfare states.

 The current challenge: towards a democratic re-embedding of the economy

The recent transformations can be seen as a new disembedding of capitalist practices from the reach of democratic institutions. From the 1980s onwards, governments have increasingly dismantled obstacles to the globalized re-organization of capitalism, partly in the hope for benefits of increased productivity, partly in the fear of loss of economic assets in global competition.

The political consequences of such economic policies are a considerably limited reach of democratic decision-making: Policies concerning taxation, industrial relations or working conditions enter directly into the global competition for capital and tend to be not pursued if they affect adversely the “business climate”. Others such as those concerning welfare or education are dependent on state revenues, thus are indirectly but severely affected by restrictive fiscal policies.  The combination of the extension of the reach of capitalist practices and the self-limitation of the reach of democratic practices is at the core of a key paradox of our time: While there have never been more societies in which politics is based on democratic procedures, the actual capacity for substantive collective self-determination is radically diminished compared to preceding periods of democratic practices.

A new re-embedding of the economy in social institutions must be conceived, which should not be seen as limited to providing a statist frame for capitalism.