Part one of this series on capitalism and democracy probed the famous remark of the American economist and sociologist Thorstein Veblen that there are historical moments when ‘democratic sovereignty’ is converted into ‘a cloak to cover the nakedness of a government that does business for the kept classes’. Part 2 extends this formulation, to ask what happens when democracy is overpowered by capitalist markets.
The Polish-born journalist Willi Schlamm, a free-market conservative who was once a card-carrying communist, famously quipped that ‘the trouble with socialism is socialism. The trouble with capitalism is capitalists.’ The quip invites a rider: ‘And the trouble with capitalists is that without democracy they bring trouble to both capitalism and democracy.’
To understand why market-driven capitalism functionally needs democracy to correct the precipitate and predatory behaviour of capitalists, we need to dwell for a moment on the phenomenon that I have elsewhere called democracy failure. Economists indebted to the work of Francis M. Bator conventionally speak about market failures. But there’s plenty of evidence of moments when the failure to apply toothy mechanisms of democratic scrutiny and restraint of reckless markets induces their dysfunction, or outright breakdown. In these circumstances, democracy failure breeds market failure; and market failure then breeds other forms of democracy failure, such as widening gaps between rich and poor.
Not to be confused with social democracy and communism and their schemes of government intervention and centralised state control of an economy, democracy failure can be defined as the political unwillingness, and the political defeat of promises, to tame the arbitrary power inherent in capitalist markets, and to bring greater equality to the lives of citizens. Practically every democracy on the face of our planet is today suffering democracy failure in this sense. But what does democracy failure actually mean in practice? How exactly does it produce market failure?
Clues can be found in a couple of topical examples. Consider the harmful dynamics that are endemic within the food production and distribution chains that span our planet. Every transaction within these highly complex and typically arcane supply chains doubles as an opportunity to cheat. For the moment, watchdog bodies such as the Aquaculture Stewardship Council and the Belfast-based Institute for Global Food Security are in short supply on the ground. National governments constrained by borders often lack the will and the means to tackle with the problem. It therefore comes as no surprise that publicly un-monitored food supply chains are highly vulnerable to such market dysfunctions as horsemeat scams and ‘gutter oil’ swindles led by market fraudsters and organised crime.
The modern history of banking and credit institutions is an equally troubling instance of democracy failure. During the past several decades, especially in the Atlantic heartlands of the global finance sector, un-elected regulatory bodies, elected governments and rating agencies such as Standard and Poor openly tolerated the practice of dispersing credit risk by selling it on to third party investors. The so-called regulatory system ended up producing the near collapse of the whole banking and credit system. Collateral debt obligations, mortgage-linked securities and other new-fangled instruments encouraged investment firms, hedge fund operators and banks such as Lehmann Brothers and the Royal Bank of Scotland to engage in reckless market adventures.
As we now know, to most people’s cost, these foolish corporate swashbucklers produced destabilising effects on the whole global economy. Millions of people are still suffering the consequences of their idiocy. The damage inflicted on markets and civil societies has prompted financial regulators around the world to force big banks to raise their capital levels and improve the liquidity of their funding sources. New laws (such as the Dodd–Frank Wall Street Reform and Consumer Protection Act  in the United States) have been passed. But the application of monitory instruments to this sector has by and large been extremely limited. Democracy failure continues to happen.
Big banks have mostly not been broken up. Some risk-producing giants, including J.P. Morgan, have actually grown much fatter since the onset of the crisis that began in 2007 and 2008. The people responsible for the serious social and political damage caused by the near-collapse of the financial sector have meanwhile remained largely untouched by courts of law. Their companies were deemed too big to fail. They are still regarded by politicians and judges as too big to jail.
The failure of democratically elected governments and other political forces to build new mechanisms of monitory democracy into the banking and credit sector ought to worry all democrats. Yes, neo-liberal economists like to tell us that financial markets, like other forms of markets, are guided by rational calculations that keep things more or less in permanent and dynamic equilibrium. Events of the past decade - and the whole history of financial markets - suggest exactly the opposite conclusion. Within markets as a whole, risk taking, recklessness and broken promises, especially within the aggressive banking and credit sector, are neither predictable nor controllable by market forces alone. Financial markets are never fully guided by rational calculations that keep things in permanent equilibrium. The evidence, both past and present, is that periodic disequilibrium of financial markets is the normal pattern.
Authors: John Keane, Professor of Politics, University of Sydney