Free markets do not necessarily mean democracy or quality of life

“The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.”
---- Milton Friedman in “Capitalism and Freedom”

Friedman’s attempts to link political freedom and free markets were belied even in his time in some economies outside the US. India, for example, had a vibrant democracy from the 1950s, even though the country had adopted a socialistic, public-ownership route to economic ownership and development.

Friedman, writes Robert B. Reich in his new book “Supercapitalism”, traveled to Chile during the rule of military dictator, Augusto Pinochet, to urge Pinochet’s junta to adopt free-market capitalism. In lectures in Chile, Friedman spoke on his pet theme – that free markets were a pre-condition to political freedom and sustainable democracy.

Pinochet took Friedman’s free-market advice, but his brutal dictatorship lasted another 15 years, according to Reich.

India has since the 1990s liberalized its economy for economic reasons, starting with a balance of
payments crisis. But the economic prosperity of the country has not reached its vast number of poor, and arguably also weakened the political process.

One of the offshoots of liberalization and the economic boom in India is that a sizeable section of the middle class, a bulwark of the country’s democracy, have got transformed into producers or consumers from their original role also as active participants in the political process.

A successful software engineer in India, for example, has neither the inclination nor the time to discuss political issues. In part the middle class may have also got alienated from the political process often by their own will, because of disgust with the rampant corruption in the political class, and a sense of “powerlessness”.

India’s neighbor China has adopted free-market principles, and is enjoying an economic boom. But this prosperity has not been coupled with political freedom and democracy. Nor has economic prosperity made democracy a more distinct possibility.

A common theme running through most free-market ideology is that markets left to themselves can solve about anything, by their ability to efficiently organize , resources, production, and consumption.

But free markets as we have found out cannot guarantee equity, or environment protection, or better quality of life. That is the work of public policy and in a democracy, policy is more likely to be influenced by citizens.

In “ Supercapitalism”, Reich, former Secretary for Labor under US President Bill Clinton, says that the US economy has been on a roll since the 1970s. Consumers have been treated to a vast array of goods like iPods, while cost of standard goods and services have declined.

However CEOs of companies cannot be counted on to be munificent, and statesmen-like as in the past. Deregulation, technology, and foreign competition have transformed the limited competition in traditional capitalism to hyper-competitiveness in a “supercapitalism”. CEOs and senior corporate executives have been instead forced by investor and consumer demands to become ruthless, profit-obsessed managers.

While consumers and investors in the US have scored big wins, this was achieved by a break down of the democratic process.

Some of the first signs of the breakdown of democracy was the weakening of the trade-unions, which was to the advantage of the individual as consumer or investor. As access to government and the ability to influence public policy becomes a competitive advantage for companies, individuals are finding themselves powerless, Reich says.

Big business is running the US as in many other countries. Contrary to Friedman’s thesis, economic and political power do not offset each other any longer, but economic power influences political power.

The answer, I think, is not in more government, but in greater, and transformed public participation in government. It is not enough to shout and be heard. You have to be able to influence. A lot of Americans, for example, oppose the Iraq war and are demanding the scaling down of US troops in Iraq, but they have not been able to influence US government policy. This is because the US, and for that matter most democracies around the world, have become once in four years, or once in five year events, when you vote or reject a government.

The need is for continuous democracy. The institutions for that will have to be created. We as citizens will have to evolve new processes for coming together as active citizens, and arriving at a consensus on issues. We will have to devise new tactics, including boycotts, protests, and demonstrations. To start with, we have to stop thinking as consumers, and start thinking about our freedom, quality of life, and issues of environment degradation and inequity.

Since only people can be citizens, only people should be allowed to participate in democratic decision making, Reich points out.