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Democracy vs. Markets

Democracy is about (1) formal rules for decision making and (2) the organisation and design of society’s institutions in order to promote citizens’ influence over society’s decisions and development. When most people think about democracy today, they presumably think about voting in elections and what happens in government, with scant opportunity to contribute between elections. However, the heart of democracy should be about people participating in decisions that affect them. The libertarian left have long defined this more clearly as self-management i.e. those affected by a decision should have influence over it to the extent that they are affected. This should extend to all areas of social life where collective decisions have to be made, whether in the family, in the community, at our workplaces, nationally and internationally, etc.

In most economies today, the dominant system for allocating goods, services and resources (including labour, natural and produced capital) is the market system, which is defined as a system of competitive bidding between individual buyers and sellers. We argue that the market system is fundamentally at odds with the concept of democracy and people having a say over decisions that affect them. For example, when an automobile manufacturer sells a diesel-engine car to an individual buyer in a market, those in the community who are affected by the air and noise pollution emanating from the car are excluded from having any say in the transaction. Furthermore, in a market, consumers “vote” on what to be produced and what investments society should make based on “one dollar – one vote” regardless of how much one is affected. The more dollars one has access to, the more votes one may cast.

Markets have a pervasive influence in every area of our lives and yet they are not held responsible for their negative consequences, such as climate change and ever increasing economic inequality. In current formally democratic market economies there is a constant tug of war between markets and democracy. The more market influence, the less room for democratic influence and vice versa. Recent events after the financial crises in 2008, with the focus on rescuing privately owned financial institutions but not rescuing homeowners under foreclosure while implementing strong austerity measures for ordinary citizens, have underlined and emphasized this contradiction. Any movement with the long term goal to transform society into a truly liberating democratic one, eventually needs to, not only address and improve the political voting process making it more transparent, direct and participatory, but also introduce democratic decision making into the economy by replacing markets with a democratic, decentralised and participatory planning procedure for allocating society’s resources.

Post-war social democracy

In the post-war period until the late 1970s, workers and ordinary citizens primarily in Western Europe and North America had rather good possibilities to influence society’s development and income distribution through relatively strong trade unions and social democratic, or equivalent, parties, which, at least partially, defended the interests of large population groups against the market. Unions were pushing for higher wages and increased influence in the workplace and had some success, even though real industrial democracy was never on the table. In Sweden the unions even went so far as to question the private ownership of companies through the proposal for the wage-earner funds in the mid-70s.

Social democratic parties redistributed income via transfers and implemented welfare reforms which ensured universal access to vital public resources such as healthcare and education.  Furthermore, many citizens were engaged in civil associations that had some influence over the development of society. These civil associations functioned as a ‘school for democracy’, wherein the participants developed skills related to making and implementing collective decisions.

Society’s aggregate demand was managed in accordance with the theories of John Maynard Keynes as the key component of economic development and governance which together with an extensive welfare system, egalitarian income transfers, and a significant number of publicly owned enterprises over which citizens at least in theory had democratic control, guaranteed a strong public sector. While social democrats originally had even more ambitious goals and visions, by 1950 and thereafter, markets were deemed necessary but were subject to and limited by democratic decisions and institutions. International financial transactions and investments were highly regulated and were not allowed to control the decisions of formally democratic institutions in sovereign nations.

All in all, the post-war period up until the late 1970’s was characterized by regulated and controlled markets, high growth, a big public sector, strong unions with much influence, and low income disparities.

Neoliberalism

Since the late 1970s, the situation has changed dramatically. The neoliberal doctrine, developed by Friedrich von Hayek and Milton Friedman and advocated through the network of the Mont Pelerin Society and its associates including academic institutions such as the Chicago Business School in the decades after the Second World War, in the 1980s became more or less the only accepted doctrine among mainstream politicians and economists. Neoliberalism emphasizes the importance of minimizing, and ideally eradicating, the possibilities of democracy to influence economic decisions. Markets, and above all, competition should guide decisions and development in all areas of society, without being hindered or influenced by decisions or actions of democratically run bodies. Market logic is to be considered a “law of nature” inaccessible to democratic decision-making and policy interventions. The aim of policy is to protect markets and society’s other institutions from democratic influence. Political power should as far as possible be delegated to “apolitical” technocrats and experts who are beyond the reach of democratic influence. If democratic institutions should exist at all, they must be subordinated to the demands of markets. The classical liberal idea that citizens have certain inherent rights as human beings that should be secured through public institutions is rejected. The only rights a citizen is entitled to are those she can secure in the market. All this, contrary to popular belief, requires a strong state and a high degree of economic coercion. The state needs to constrain the available choices that individuals have by enacting and upholding laws that protect private property, market negotiations, contracts, etc.

This agenda has been successfully enforced worldwide. Society’s democratic institutions have been systematically dismantled in line with market demands. Trade unions’ power and influence have been curtailed. There are differences between countries as to how far they have reached in this neoliberal development but there is no doubt about the general direction.  Deregulation and free trade agreements have given corporations and especially financial capital great power to play countries off against one another. It has made it difficult, almost impossible, for countries to pursue an independent policy that goes against the demands of the market regarding labour rights, environmental protection, taxation, welfare policy, fiscal policy and so on, which of course was one of the purposes of deregulation.  The power of trade unions to influence wages and working conditions has also been very negatively affected by deregulation and free trade agreements.

Extensive privatization of an increasing number of activities that were previously provided by the public sector has (1) reduced the sphere that is subject to democratic influence and (2) opened up new markets and created more profit opportunities for capital. Monetary policy has been delegated to independent central banks that are “protected” from democratic influence. At the same time, monetary policy, and hence central banks, has been given more influence since national parliaments have more or less given up on fiscal policy in the face of the demands from markets for low taxes and reduced government spending. The central banks’ only responsibility is to keep inflation under control, which is the same as saying that unemployment should be kept at a high enough level not to drive inflation. In Europe, and elsewhere, formal power is transferred from national parliaments to supranational bodies such as the OECD, ECB, the European Commission, IMF, World Bank, etc., bodies that decide on, for instance, debt ceilings and budget deficits in member states based on market requirements. These institutions are designed to be inaccessible to democratic influence and are located far from the citizens who are affected by the decisions. In some cases, democratically elected representatives have even been displaced and replaced by unaccountable technocrats such as in Greece and Italy in the wake of the financial crisis in 2008, in order to satisfy the demands of the market and to preclude democratic influence. The deregulation of global financial markets since the 80’s has been particularly remarkable and plays an important role in the explanation of the 2008 financial crisis.

In summary, the triumph of neoliberalism since the end of the 1970s has led to stagnant growth, enormous inequalities, financialisation of the economy and increased corruption.  Power relations have dramatically shifted to markets’ advantage at the expense of weakened democratic institutions, which in principle have become executors of the market’s requirements and preferences.

Alternatives

There are those who advocate and work for a different path of development than neoliberalism. Many organisations and political parties situated to the left of the Social Democrats adhere to some variant of the market-socialist vision in which democratic institutions are given greater power and influence, and the means of production are owned in common by the community or by the workers, but where goods and services are still allocated through markets. Two of the more well known proponents of market socialist theories today are David Schweickart (Economic Democracy) and Erik Olin Wright (Real Utopias).

Some, like Gar Alperovitz and Richard D. Wolff, emphasise the need to start experimenting with democracy on a small scale now, within the capitalist system, if democracy is to work on a large scale.  According to Alperovitz, activists need to start taking control of companies and run them as democratic, worker controlled cooperatives within the framework of the capitalist market system. Mondragon in Spain and Vio.me in Greece are often mentioned as successful examples of worker-controlled companies. Furthermore, some regions and municipalities are experimenting with more democratic budget processes – called, participatory budgeting – in which citizens are given a larger influence over the allocation of a region’s or municipality’s public assets. Such examples serve as a source of inspiration for many people and often manage to increase democratic influence and (in companies) reduce differences in the levels of pay between the highest and lowest paid workers.

However, companies existing in a hostile institutional environment are always forced to fight an uphill battle to preserve their “cooperative principles”, i.e. a commitment to internal democracy and egalitarian pay structures. In the long-term, they risk either having to increasingly adapt to a capitalist market logic with authoritarian internal decision-making hierarchies and increasing wage differentials and thus thwarting any progress, or the burn out of their members who often must take on considerable extra efforts and sacrifices, often with lower compensation compared to comparable jobs, in order for their companies to survive in the market.

Social Democracy and the major unions have long accepted both private property and markets. Their strategy has been to increase trade union’s power and influence over decisions discussed and made in boardrooms, without seriously questioning the ownership rights and the owner’s final decision-making rights. This means among other things that major unions have always had, and still have, an ambivalent attitude towards the cooperative movement since members in coops will act both as owners, which in a capitalist market system are subject to market demands, and workers whose fundamental interests run counter to market logic.

Whether one prefers a social democratic strategy for controlling and confining the market and increasing democratic influence in society, as in the post-war period, or whether one advocates for a more far-reaching market-socialist vision in which the means of production are owned in common, any potential gains will be limited, require enormous sacrifice, and risk being rolled back as long as markets are accepted as the dominant allocation mechanism, since markets and democracy are fundamentally incompatible. Profit seeking entrepreneurs will constantly be in search for any new business opportunities, which means expanding into new geographical areas and social areas which were not previously organised by markets populated by for-profit suppliers.

Contradictions between democracy and the market

To the extent that decisions about what should be produced, consumed and invested in a society are made through markets, all parties affected by the decisions are excluded from influence, except the buyers and sellers striking the deal. From an economic perspective, this is not only undemocratic but also inefficient since resources will be allocated based on inaccurate and incomplete information regarding the alternatives’ social benefits and costs. Long-term effects, on the environment and health, for example, will be overlooked or ignored.

Furthermore, if employees or co-op members are hired through negotiations via labour markets, work compensation – income – will be determined based on the jobseeker’s bargaining power and/or capacity to contribute to the company’s production and revenues, regardless of her effort or sacrifice, leading to large income disparities both between different categories of workers and between individuals. This is unfair because effort and sacrifice are the only factors a worker can directly influence, while other factors that affect a worker’s productivity are beyond his/her control, such as the quality of work tools, talent, genes, luck and so on. This is true regardless of whether the means of production are commonly or privately owned. If society is capitalist, i.e. if production and financial assets are privately owned, income inequality and wealth concentration is amplified, since capital owners receive income without doing any work – profits – and the more capital the greater the profit. Income in turn determines (1) an individual’s opportunity to get access to goods and services, and (2) her opportunity to “vote” on what should be produced and what investments should be made in a society, in accordance with the principle of one dollar – one vote.  In capitalist democracies, even formal political influence is to a large degree determined by differences in income and assets, despite the idea that this influence should be democratically one person – one vote. Extensive financial assets introduce many opportunities to exercise political power, for instance through donations and lobbying.

Markets also undermine the skills and abilities that are necessary for a truly democratic process, e.g. the ability to make collective decisions and to feel empathy and solidarity with others. Markets are social environments that reward certain characteristics such as egoism, callousness and indifference while solidarity and empathy are punished. Those who most effectively exploit one’s fellow human beings are rewarded.

Finally, market competition means that workplaces must always prioritise cost savings, even in cases where operations are profitable, which in turn facilitate hierarchical decision-making structures where supervisors are hired to make the “tough decisions” to the detriment of ordinary workers because the workplace must always, above all, be competitive.

A democratic non-market alternative

The notion that there is no alternative allocation mechanism to the market today is widespread, even within large parts of the left, which is one of the main obstacles to the creation of a democratic and equitable economy. People have, however, the right to be sceptical of non-capitalist visions considering the failed attempts of state socialism in the twentieth century, and today’s non-capitalist alternative visions must be a clear alternative to both markets and authoritarian central planning.

The challenge is to find a solution that allocates power and influence to workers and consumers and at the same time protects the interests of other groups in the economy that are affected by their decisions and actions. The same is true in the political sphere. In the twentieth century there were, for all intents and purposes, no efforts made to advance and develop the basic tenets of parliamentary democracy towards more participatory decision making. Therefore the work for a more democratic economy is crucially connected with politics that aims to outgrow and advance parliamentary democracy. The aim is a participatory democracy with less indirect representation and with people having more actual say over the decision making of their communities.

In an economy, most economic decisions will affect many people, but to different degrees, and the challenge is to give workers and consumers self-determination over their actions to an extent that is appropriate.

In a democratic economy, in which self-management is a goal, there is no room for private capital owners or shareholders who own factories and other productive resources, who control what is produced and how production is organised and seek maximum returns on private investments without regard to adverse effects on other groups in society. Nor is there room for private banks or other creditors who control access to investment opportunities for those who do not have their own fortunes. There can be no groups of workers whose only function is to obey orders or exclusively perform monotonous and repetitive tasks, while other workers make all the decisions and monopolise tasks that give access to information and power. Any differences in income must be small and based only on differences in effort or sacrifice and not on differences in factors that are beyond human control.

Any viable long-term democratic alternative to the market system must (i) be truly democratic by enabling those affected by economic decisions to have a say through a bottom-up structure of industrial and geographical federations, (ii) be decentralised, with no central planning bureaucracy, (iii) generate the necessary information to reveal the true social benefits and costs of making different choices, including the impact on other people as well as the environment, and finally (iv) encourage participation without being overly time-consuming or tedious.

One example of such an alternative is the participatory economics model designed by economists Michael Albert and Robin Hahnel. Information on the model can be found at www.participatoryeconomics.info.

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